A Directors’ Loan Account (DLA) tracks money that a director borrows from or lends to their company. It’s an important area to manage correctly, as it has tax implications for both the company and the director. Here’s what you need to know:
What is a Directors’ Loan Account (DLA)?
A DLA reflects the amount of money a director owes to the company (borrowed funds) or the amount the company owes to the director (loaned funds). It is usually used for short-term financing needs, such as withdrawing or injecting money into the business.
Tax Implications for the Director
- Borrowing Money from the Company
If a director borrows money from their company, they could face personal tax charges under certain conditions:- Benefit in Kind Tax:
If the loan exceeds £10,000 at any point during the tax year and there is no interest charged or it’s at a low rate, HMRC may treat this as a benefit in kind. The director would be liable to pay tax on the benefit, and the company must report it via P11D. - Loan Written Off:
If the company writes off the loan, it could be treated as income for the director, making it subject to income tax.
- Benefit in Kind Tax:
- Overdrawn Loan Account
If the director owes the company more than they’ve loaned to it (i.e., the account is overdrawn), there are further tax implications:- Corporation Tax Surcharge:
If the loan is not repaid within 9 months of the company’s year-end, the company may be required to pay a 32.5% corporation tax surcharge on the outstanding balance.
- Corporation Tax Surcharge:
Tax Implications for the Company
- Loans to Directors
The company needs to be cautious when making loans to directors, as it can lead to tax liabilities if not managed correctly:- Interest Charges:
The company may charge interest on the loan, and this interest income will be taxable for the business. However, if the loan is written off, it can result in a tax deduction for the company.
- Interest Charges:
- Corporation Tax on Overdrawn DLAs
As mentioned, if the director’s loan account is overdrawn and not repaid within 9 months, the company must pay a 32.5% surcharge on the loan’s balance.
Repayment of the Loan
- Repaying the Loan:
If the director repays the loan, the company may not face additional tax liabilities. The director will also not be liable for benefit-in-kind tax if the loan is paid off promptly. - Tax-Free Withdrawals (within limits):
If a director’s loan is repaid within the tax year, there may be no personal tax charges. The company will also not incur a corporation tax surcharge.
Key Points to Keep in Mind
- Directors must keep accurate records of loan balances and repayments.
- Overdrawn DLAs need to be repaid or managed within the tax year to avoid additional tax burdens.
- Companies should consider charging interest on loans to prevent potential tax implications for the director.
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