Directors' Loan Account - Everything you need to know!
A directors’ loan account (DLA) is an account that records all transactions that occur between you and your company. You can think of it like a bank account with an overdraft facility, however instead of the bank owing you money (or you owing the bank money), it is money owed from / to your company instead.
Most owner-managed businesses will have a DLA of some description, however some are used significantly more than others.
When your DLA is in credit (that is, the company owes you money) – you can withdraw those funds from the company bank account into your personal account with no tax consequences.
If your DLA is in debit (that is, you owe your company money) – you should look to repay this and clear the balance, as keeping your DLA overdrawn for too long can create unexpected tax and other consequences (discussed further below). This is commonly referred to as an “Overdrawn DLA”.
What transactions usually go through my DLA?
When thinking about what transactions occur into your DLA, it is important to separate transactions into two categories. The first category is transactions which increase your DLA balance (that is, increasing the amount your company owes to you). The second category is transactions that reduce your DLA balance (that is, reducing the amount your company owes you).
If you transfer money to your company from your personal funds, or you are entitled to receive some payment from the company (which you have not yet withdrawn from the company bank account), then this will increase your DLA.
If you withdraw funds from the company or pay for some personal expenses from the company bank account, then this will reduce your DLA.
Common transactions that increase the balance on your DLA:
- Declaring a salary to yourself through a payroll scheme
- Declaring dividends
- Paying personally for business expenses on behalf of your company
- Claiming mileage
- Transferring assets held personally into your company, including property
- Making a use of home office claim
- Transferring funds into the company bank account
- Making cash deposits into the company bank account from your personal cash
- Interest charged to your company from yourself personally on the DLA balance
Common transactions that decrease the balance on your DLA:
- Transferring funds to a private bank account
- Withdrawing cash from the business
- Paying for personal expenses from the business bank account
- Transfer business assets into your personal name
- Interest charged from your company to yourself on the overdrawn DLA balance
What happens when my DLA is overdrawn?
An overdrawn DLA can trigger a corporation tax charge as well as a P11D benefit charge.
If you have an overdrawn loan account which is repaid in full within 9 months after your company year-end then there will be no corporation tax consequences.
If the DLA is not repaid within 9 months of the year end, HMRC will charge the company corporation tax at 32.5% of the outstanding loan balance. For example, if the DLA is overdrawn by £10,000, the tax charge will be a £3,250. This is a large tax charge as HMRC want to discourage directors from borrowing from their company.
If and when the overdrawn balance is repaid to the company, HMRC will reimburse the tax charge back to the company 9 months after the end of the accounting period when it was repaid. So if your year-end is 31 March 2022, and it was repaid on 15 April 2022, HMRC will not repay the tax charge until 31 December 2023.
In addition, if the overdrawn loan balance is over £10,000 at any point during the year, and no interest is charged (or interest is charged at less than commercial rates), HMRC take the view that you are receiving a benefit from your company as you have received a loan but are not paying interest. You will therefore have to pay income tax and national insurance (both employee and employer) on the loan balance. You will have to complete a form P11D to declare this benefit.
How can I clear an overdrawn DLA?
There are various different ways to clear a DLA:
- The simplest way is to simply pay the funds back into the company. By doing this, there will be no tax liability for your company or yourself individually. However, this assumes you have the sufficient funds personally to do so.
- Another way is to declare a dividend and credit this to your DLA. A dividend can only be declared as long as there are sufficient profits available in the company to declare a dividend. The dividend will need to be declared on your personal tax return and will be taxed accordingly (8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers, and 39.35% for additional rate taxpayers).
If there are not sufficient profits available in the company, then a dividend cannot be declared.
- You can also declare a salary / bonus in order to clear an overdrawn loan account. This will usually be the most expensive option, as you will have to pay income tax and national insurance personally, and your company may also pay national insurance.
To do this, you will need to put this through the company payroll scheme.
- Finally, you can keep your DLA as overdrawn and pay the 32.5% tax charge. You can then repay this whenever you can and receive the 32.5% back in proportion to how much you have repaid.
Understanding your DLA is important to understand how transactions work between yourself and your company. It is also important to understand the consequences of having an overdrawn DLA.
If you have any queries relating to the above, or anything to do with your loan account, please do get in touch with one of the team who will be happy to assist.