What is a Director's Loan Account? (Part 2)
Posted on 5th September 2019 at 15:33
Last week, we started learning about director's loan accounts and why they can be handy. A director’s loan account details all of the transactions that are made between a company and its directors, and they can be really useful - hence why they're so popular amongst limited company directors.
In the blog post last week we covered when and how a DLA might be used, which tax rules (including personal tax) apply, and whether a director's loan can be written off. This week we delve a little deeper, covering what happens when your company might owe you money, what interest is charged on a director's loan, overdrawn DLA rules and our final thoughts on the pros and cons of a DLA.
What happens if your company owes you money?
Often in limited companies, a director will lend their company money to pay for certain assets or as start-up capita. This money is not considered income for the company, so no tax is due on it, and it sits in the directors loan account until the company has the funds to repay it..
However, you can charge interest on the amount that the company has ‘borrowed’ from you. This will count as both a personal income for you and a business expense for your company. This interest will, however, have to be reported on a self assessment tax return. According to HMRC, the company must:
Make a note of and pay the income tax every quarter using the CT61 form;
Pay you the interest, minus income tax at a rate of 20%.
What interest is charged on a director's loan?
If you need to borrow money from your company and you use a DLA, if the loan is over £10,000 HMRC will consider this to be a benefit in kind unless you pay the official rate of interest. As it is a complex area, it is vital that you take the advice of your accountant to understand the implications involved.
Overdrawn DLA rules
It is important to be aware of the rules that come with an overdrawn director’s loan account. If you have taken out more money that you have put in, the DLA will be considered overdrawn - this means that the director owes the company money. While it is still unpaid, it will be considered a company asset – which means if it becomes insolvent, the liquidator will request the balance to be paid.
As mentioned above, and in part 1 of our blog, in order to ensure this does not happen, you should repay the money that you borrowed within the company's year-end or within nine months. An overdrawn DLA can cause a multitude of issues, not only for the director but also for the company itself. A sign that the business might have to be dissolved, it will cause your investors and shareholders to worry about the future of the business - and nobody needs that!
Pros and cons of a director’s loan account
It is clear that there are pros and cons that come with a DLA. For the latter, it is vital that you consider the risk of having to pay the loan off personally and that it might accrue interest, tax and national insurance. But although it has its disadvantages, it is clear that a DLA has many benefits that you can reap if you decide to use it correctly and with the support and advice.
Firstly, it can be incredibly efficient to have a DLA. You can keep track of any withdrawals associated with business operations as you having everything in one account. This makes it easier to submit tax forms each year and for your accountant to keep track of any withdrawals.
Many directors of limited companies also favour a DLA as it gives them the flexibility to see how much they have borrowed, how much the company owes them, etc. A tax-sensitive technique, it will benefit a limited company by keeping them organised, efficient and aware of how the business is operating - which is particularly important for start-ups.
Final thoughts and next steps...
As a director of a limited company, it is essential that you seek professional advice and that you are sensible with the amount that you withdraw from the account – keeping in mind that it can’t be used for personal expenses or salaries. Without knowledge of the withdrawals, your company could soon be in trouble.
It is also imperative that you remember that HMRC monitor DLAs regularly - particularly ones that are regularly overdrawn. If they notice that the money is subsidising a salary, they could charge both National Insurance and Income Tax. To ensure that this doesn’t happen, you should not exceed the £10,000 threshold mentioned above (or if you do, you are aware of the implications).
Although a DLA will give you welcomed flexibility, it is important not to take advantage of it – as a director, it is still your responsibility to make sure that you aren’t withdrawing more than the business can afford and that the funds are being used for business purposes only. The guidance of an accountant will help with this, but it is good practice to still monitor this yourself within your role.
Nicola J Sorrell -
Founder | Xero Champion | IR35 Expert
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