You will most likely hear your accountant mention “directors loan accounts” (DLA) frequently if you are a limited company. But what on earth are these and how do they work?!
A director’s loan account is made up of money you’ve taken from your company bank account that isn’t one of the following;
- Salary payments
- Dividend payments
- Expense repayments
It is also made up of money you’ve previously paid into or loaned the company, this is often for start-up costs or to boost the bank account if it gets a bit low unexpectedly.
If you’ve taken money out the business for any other reason, for example you’ve used the business bank card by accident instead of your own and not repaid the money, then this will be recorded into your DLA. At the end of company’s financial year we will look at your loan account activity and you will either owe the company money or the company will owe you money.
Usually the DLA will be made up of money the directors have paid into the business and personal expenses paid through the business. Business expenses are any expenses that have been incurred wholly, exclusively and necessarily for the purpose of business function, so anything that fails to meet these guidelines will be posted to your director’s loan account. Common examples of non-business expenses are director’s personal tax paid through the company bank account, flights that aren’t for business purposes and food that isn’t covered by staff entertaining or subsistence.
If at your year-end your director’s loan account is overdrawn, which means you owe the company money, you may need to pay tax. If you pay back the entire loan amount within nine months of the company’s year-end, you won’t have to pay any tax. However if you don’t, any overdue directors loan will pay Corporation tax at 32.5%. If the loan is over £10,000 it will also be considered as a benefit in kind, and will have to be recorded on your P11D. This means you will have to pay Class 1A National Insurance at 13.8% on it as well as additional personal tax.
If the loan is written off, which means it is not repaid by the director, it will also be considered a benefit and Class 1A national insurance and income tax will be due on the amount.
If the company owes you money it means you can withdraw this money tax free whenever the company has the funds available.
When a loan in excess of £10,000 is repaid by the director, no further loan over this amount can be withdrawn within 30 days. If this happens, it’s HMRC’s view that the director doesn’t intend on paying back the money and the amount over £10,000 will be taxed.
We recommend keeping track of your directors loan account throughout the year to ensure it stays below £10,000. With our monthly bookkeeping packages this is something we keep an close eye on to advice you on throughout the year.