A Director’s Loan Account, commonly abbreviated to DLA, records the money a company director borrows or lends to the company. It covers transactions outside of salary, dividends or reimbursed expenses.
How Does a Director’s Loan Account Work?
When you take money from your company that is not salary, dividends or expenses, it is classified as a Director’s Loan. Similarly, if you lend money to the company, it records the transaction in the Director’s Loan Account. As a director, you must keep these records clear as HMRC monitors them closely.
Remember:
- A DLA can be in credit (the company owes you money) OR in debit (you owe the company money)
- If your account is in credit, you can withdraw the funds at any time without tax consequences
- If the DLA is overdrawn, tax implications may apply
Why Might a Director Take a Loan?
Directors might take a loan for various reasons, such as:
- Covering unexpected personal expenses
- Accessing funds beyond salary and dividends
- Managing temporary cash flow issues
However, you should borrow from your company with caution. HMRC imposes strict rules on borrowing and failing to repay a loan on time can lead to tax charges.
Repaying a Director’s Loan
If your Director’s Loan Account is overdrawn at the end of the financial year, you have 9 months and 1 day to repay it. If not repaid, your company must pay Section 455 Tax at 33.75% of the outstanding balance.
Ways to repay the loan:
- Direct Repayment – Transferring money back to the company
- Dividends – Using company profits to clear the debt
- Salary Adjustment – Increasing salary to cover the loan amount
If you do not repay the loan and the company writes it off, HMRC will treat it as income and you will pay tax on it.
Tax Implications of Director’s Loans
Loans Under £10,000
- No tax applies if repaid on time
- If unpaid, HMRC may treat it as a Benefit in Kind, which requires tax reporting
Loans Over £10,000
- Automatically classed as a Benefit in Kind
- You must report it on your Self Assessment
- The company must pay Class 1A National Insurance at 13.8%
If you repay the loan but withdraw another within 30 days, HMRC considers it a Tax Avoidance tactic called “Bed and Breakfasting” and tax penalties will apply.
Lending Money to Your Company
Directors can also loan money to their company. If you charge interest, the company records it as a business expense and you must declare it as Personal Income on your tax return. The company must also deduct 20% Income Tax on interest payments to you.
What Happens If You Owe the Company Money?
If you owe your company more than £10,000 interest-free, it is a Benefit in Kind and you must record it on your P11D. This means the director pays personal tax on the loan and the company pays National Insurance at 13.8%. The company may face additional Corporation Tax penalties if unpaid.
Additionally, a liquidator may pursue you personally for repayment if you liquidated your company.
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