A directors loan account (DLA) is used when directors take money out of a company which hasn’t been declared as income. It’s also used when they lend money to the company.
It’s basically a balancing account.
A director can take income from a company in various ways. They can take salary, via a pay as your earn (PAYE) scheme, dividends (if the directors own shares) or interest (say if the directors loan account is in credit).
If the money taken can’t be explained as income, then it is entered onto their loan account.
If the director gives the company more money than they are paid back in a year, then the company owes the director money, and vice versa.
The director can build up the balance due to them in a number of ways;
They could give the company a cash injection, or they could pay some expenses direct.
***Top Tip*** They could also declare dividends but not pay them. This can be extremely tax efficient if you’re looking to draw a large amount of cash from your company in a few years. Ask us if you want to know more about how this works.
At the company year end, the directors loan account is balanced up. This will show either a balance owed by the director, or vice-versa.
Here’s what you need to consider in each scenario;
- Company owes the director money – a potentially good situation with options to save tax
- Has it been this way all year? If so, that’s great. The director may want to charge interest on the loan. This can be extremely tax efficient for owner managed businesses in certain cases. We’ve recently helped one customer save £5,500 in taxes. Want us to look at this for you? Contact us here.
- Can you increase the balance with a dividend within your basic rate band, saving tax in future years at a higher tax rate?
- Is the company in a position to pay the debt off. The director won’t pay tax on this, simply label as a directors loan account payment on the bank transfer.
If your company owes you money, you need to know so you can make an honest appraisal of your options. Contact us here if you want more help.
- Director owes the company money – several issues to deal with
- Section 455 tax is payable on overdrawn loan accounts where the loan is outstanding more than 9 months and 1 day after the corporation tax period end date. The tax rate is 32.5%, ouch. This has to be paid when you pay your corporation tax bill. This can mean a hefty tax bill.
When the loan is repaid, the S455 tax is recovered from HMRC. You have 4 years to make the reclaim, so make sure you do this!
- If the loan was over £10,000, or it was at any point during the year, then the loan needs to be declared on a P11d. The director will pay tax on the difference between the interest rate he has paid to the company and the official rate of interest with HMRC. The company will also pay employers national insurance on the benefit.
- Bed and breakfasting rules stop directors repaying the loan for 30 days before the year end and corporation tax payment date, and 30 days after both dates. This means you can’t pay the loan back a day before the year end (showing the company owing the director money) and take out the day after. In this case, the loan would still need to be declared on the CT600a with tax paid.
Do you know how much you owe your company? If not, now’s the time to find out and make sure you don’t pay unnecessary taxes. Contact us to see how we can help you fix things.