Director’s loan accounts (DLA):
A director’s current or loan account is a way for directors to essentially lend money to or borrow money from their company.
The director’s loan account (DLA) is, in essence, a record of all transactions that occur between the company and its directors.
1) Loaning money to a company:
Director’s loan accounts are a usual way of injecting capital into the company where any money loaned to the company is not subject to corporation tax.
Why lend to your company?
Director’s loans can be particularly helpful to new business owners whom wish to ease the financial burden of opening up a new company which has very little start-up capital.
The money can be used to help ease any cash flow issues or even purchase assets for the business that will be used to generate future economic benefits.
Loaning money to your company gives you as the director, the option to charge interest on the loan. The interest charged is recorded as a business expense for the company, which is reported in the financial statements.
This interest charged however, counts as personal income for you and must be reported on your Self-assessment return as savings or interest income.
It is important to consider the amount of personal savings allowance that is available to you as this could ultimately increase your total tax liability.
Personal Savings Allowance:
Under current legislation for savings or interest income, basic rate taxpayers have an annual personal savings allowance of £1,000, for higher rate taxpayers it’s £500 and for additional rate taxpayers, there is no allowance available.
As a result of charging interest on the loan, the company is subsequently required to deduct Income Tax from the interest payments at the basic rate of 20% prior to paying any interest to the director.
Then this income tax collected must then be paid to HMRC every quarter using a specific form (CT61).
For more information on the Personal Savings Allowance, please see the link to our blog:
Personal Savings Allowance
2) Borrowing money from a company:
Any funds drawn from the company which are not the below would be deemed as a loan to the director:
- A salary, dividend or expense repayment
- Money you have previously paid into or loaned the company.
You must ensure that you keep sufficient evidence of all transactions involving your director’s loan and personal finances should HMRC decide to investigate.
Is there a limit on what you can take as a loan?
There is no stated limit to the amount you can draw, however director’s loans must be approved by the company.
It is also important to note that if the amount drawn from the company exceeds £10,000, then this will be classed as a benefit in kind which will need to be recorded on a P11D.
This amount will then be subject to both personal & corporation tax and the company will be required to pay Class 1A National Insurance at 13.8% on the full amount.
Do you pay tax on a director’s loan?
If your director’s loan account is overdrawn at your company accounting year-end and not cleared within nine months of this date, you will be required to pay corporation tax at a rate of 32.5% on any outstanding balance.
However, any amount of corporation tax paid in relation to your overdrawn DLA will be repayable to the company by HMRC once the loan is repaid in full by the director or if the balance is written off, though any interest paid on the corporation tax cannot be reclaimed.
Any repayment claim must be raised within four years from the end of the accounting period when the loan was taken in order to receive the rebate.
For more information on how to reclaim this tax please follow the link to HMRC below: