If you’re a company director, understanding how you can take money out of your business is crucial. Limited companies are separate legal entities, so the rules are strict. One area that often causes confusion is the Director’s Loan Account (DLA). Let’s break it down.
What is a Director’s Loan Account?
A DLA is a record of transactions between a company director and their company. It’s where you track money you’ve taken out that isn’t a salary, dividend or a reimbursement of business expenses. It also tracks any money you’ve put into the company as a loan or repayment. Think of it as a running tab of what the company owes you or what you owe the company.
- Withdrawals: This is when you take money from the company for personal use. This could be via a bank transfer, using a company card for personal purchases, or even using your own money for business expenses.
- Balance: If your DLA shows a debit balance, it means you owe the company money. If it’s a credit balance, the company owes you.
- Each director should have their own separate DLA.
- Payments to a director’s family, friends or business partners may also need to be recorded if the company is a ‘close company’.
- Amounts due to the director from the company should be recorded as a creditor, while amounts due from the director to the company should be recorded as a debtor.
What Can You Use a Director’s Loan For?
Technically, you can use a director’s loan for almost anything, from car repairs to holidays. However, it’s usually best if these are short-term, one-off situations because of the tax implications.
How Much Can You Borrow?
There’s no limit on how much you can withdraw, but borrowing too much can affect the company’s cash flow. If your DLA goes over £10,000, it’s automatically considered a Benefit in Kind (BiK) by HMRC.
Tax Implications of Director’s Loans
This is where things can get complicated. Here’s a breakdown of the tax consequences:
- Benefit in Kind (BiK): If the loan exceeds £10,000 at any point in the tax year, it’s treated as a BiK. You’ll need to declare it through payroll or on a P11D form, and you’ll pay income tax, while the company will pay National Insurance contributions.
- Repaying the Loan:
- Ideally, repay the loan within the same accounting period. This means the company won’t have to pay corporation tax on it.
- If you repay it within nine months and one day of the company’s year-end, the company won’t have to pay corporation tax but must still show the amount owed on their Company Tax Return.
- If the loan is still outstanding after nine months and one day of the accounting period, the company will have to pay Section 455 Corporation Tax at a rate of 33.75%. HMRC will also charge the company interest until the tax is paid. The company can reclaim this tax once the loan is repaid.
- The tax rate for loans made before 6th April 2022 is 32.5%.
- ‘Bed and Breakfasting’: You can’t repay the loan just to withdraw it again to avoid tax. If you repay more than £5,000 and take out a further loan of over this amount within 30 days, the company may incur corporation tax at 33.75%. Additionally, if a loan of over £15,000 is made, with the intention of taking a further loan of over £5,000, then the bed and breakfast rules may apply.
- Writing off the Loan: If the company writes off the loan, it’s treated as a dividend. You’ll need to include it on your self-assessment tax return and pay income tax, and the company will have to pay Class 1 National Insurance contributions. The company will not receive corporation tax relief on the amount of the loan written off.
Can You Offset a DLA?
If there are two directors and one owes money while the other is owed money, you can offset the balances if the directors agree in writing and proper documentation is kept.
Interest
HMRC expects companies to charge directors a nominal interest on DLAs. The interest rate is usually 2.25% per annum, calculated on a daily basis.
Loans to the Company
You can also lend money to your company using your DLA. The company won’t pay corporation tax on this. You can take the money back anytime, though there may be tax implications if your DLA is overdrawn at the year’s end. If you charge interest, this will be a business expense for the company and personal income for you.
Important Considerations
- Record Keeping: It’s vital to keep accurate records of all DLA transactions.
- Shareholder Approval: Loans over £10,000 generally require prior shareholder approval.
- Monitoring: It is recommended to monitor your DLA to avoid exceeding the £10,000 threshold.
- Liquidation: If the company goes into liquidation, the liquidator can demand that you repay the DLA balance.
Key Takeaway
Director’s Loan Accounts can be useful but have complex tax rules. It’s important to be aware of the implications. Always consider seeking advice from an accountant to make sure you’re managing your DLA effectively and staying on the right side of HMRC.