What is a Director's Loan Account?
The Director's Loan Account (DLA) keeps track of any transactions between a Director and their limited company. Director's must remember the money in your limited company's bank account doesn’t technically belong to you and any transactions to/from the company must be justified as either:
A salary, dividend or expense repayment
Money you’ve previously paid into or loaned the company
At the end of your company’s financial year, you’ll either owe the company money or the company will owe you money. This is recorded as an asset or a liability in the balance sheet of your company’s annual accounts.
What should a DLA contain?
Items you should record in your DLA are:
Any cash withdrawals from the company that you’ve made as a director
Personal expenses which were paid with company money or credit card
Business expenses are any expenses that are incurred wholly, exclusively and necessarily in the performance of business activity (read our guide here). Anything that fails this test is, therefore, a personal expense.
Why would you take a loan?
It can be useful to access company funds as a quick solution to cover an unexpected bill but it is important to remember that it must be paid back or classed as a dividend which may incur personal taxes.
What happens if I owe my company money?
If you owe your company over £10,000 (interest-free) at any given time, the loan is classed as a Benefit in Kind and you’ll need to record it on a P11D. This is incur both personal and company tax liabilities.
Will I have to pay tax on a DLA?
If you owe the company money at the date of your company’s year-end, you may need to pay tax. To ensure this tax charge isn't applicable, you must pay back the entire director’s loan within nine months and one day of the company’s year-end.
If you cannot repay your DLA balance in full, your company will pay additional Corporation Tax at 32.5% on the balance outstanding. This extra 32.5% is repayable to the company by HMRC when the loan is repaid to the company by the director.
If you need to use a dividend to pay off the balance, there may be personal tax to pay at 7.5%/32.5%. This is not repaid by HMRC when the loan is repaid.
Bed and Breakfasting
HMRC introduced measures to stop directors using their DLAs in a way that means they might avoid tax, this is called bed & breakfasting.
This is a method sometimes used by directors to avoid tax by repaying their loan back before the year-end, only to immediately take it out again without any real intention of paying the loan back.
When a loan in excess of £10,000 is repaid by the director, no further loan over this amount can be taken within 30 days. When this happens, HMRC's view is that the director doesn’t intend to pay the money back and the full amount will automatically be taxed.
If the company owes you money
Typically there are no tax implications of the company owing you money you and you can withdraw the full amount from the company at any time.
You can choose to charge interest, this will be classed as a business expense for your company and personal income for you however, the interest amount must be declared as income on your Self-Assessment and taxed accordingly.
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