What is a Director’s Loan Account and how does it work?
As the Director of a Limited Company, you have a great deal of financial responsibility. One tax legislation that you will have heard of is a Director’s Loan Account, but what is it and why is it important?
In this blog post, we will look at the details of Director’s Loan Accounts (DLA), what it is, how it’s used and the tax implications of a DLA.
What is a Director’s Loan Account?
A Director’s Loan Account is essentially a record of transactions between a director and their company. Each company director has their own personal Director’s Loan Account.
Money made by your company belongs to the company. Any money a director withdraws from the company is through a director’s loan.
If, as a director, you take money from your company for personal purchases or vice versa, this needs to be recorded on the Director’s Loan Account (DLA). As it is a loan, it needs to be paid back.
HMRC states that this loan is not the same as
- a salary payment
- an expense repayment
- a dividend (If your company cannot afford to pay out dividends, but they are still taken, they are treated as a loan and must be repaid)
- repayment of a loan previously paid into the company
The Director’s loan tracks money that you lend to or borrow from the company, or if you have paid for business expenses from your personal account, you pay yourself back from the company account. Any company money used for personal expenses must be recorded and paid back.
As a company director, you must have your own loan account to prove
– all cash withdrawals made from the company (is this to the Director/for personal expenses??)
– all personal expenses paid with the company’s money
– Personal lending to the company
Things to consider with a Directors Loan Account:
#Financial Flexibility
#Tax Implications
#Company Law
#HMRC compliances
#Documentation and record keeping
As you can see, there are a lot of aspects to a DLA, it’s not as simple as moving money from one account to another. Remember, you are not alone and can take advice before taking out a DLA.
Let’s look at each of these in turn:
# Financial Flexibility:
Director’s Loan Accounts provides you as the director with a flexible way to manage finances within the business. It might be useful to cover unexpected personal expenses such as home repairs.
# Tax Implications:
Understanding the tax implications of transactions through Director’s Loan Accounts is crucial. It can impact the financial performance for both you and your company.
If the DLA is in credit, you don’t owe the company money and won’t be taxed on this. If it is in debit at the company year end, then you are subject to additional tax.
An overdrawn DLA is seen as an interest-free loan to the director and has serious tax implications.
A director’s loan does require a lot of paperwork, especially with tax, so it’s something that you really need to think about and get independent advice on.
To make sure you understand the full tax implications, seek professional advice. you don’t want to have a shock tax bill and not enough money to pay it.
# Company Law:
You must adhere to company law regulations regarding loans to and from the company. Staying compliant ensures the avoidance of legal complications. The law states you must keep a record of any money you borrow from, or pay into, your company. An experienced accountant will advise you on any updates to company law that will affect you.
# HMRC Guidelines:
The HM Revenue & Customs (HMRC) provides guidelines on tax implications related to Director’s Loan Accounts. Staying informed about these guidelines is essential for accurate reporting. For further information and case studies – Fact sheet: Director’s loan accounts – GOV.UK (www.gov.uk)
There are rules around paying back the loan too. For example, you must wait 30 days between repaying one directors loan account and starting another so that HMRC doesn’t think that you are attempting a tax dodge.
# Documentation and record keeping:
Thorough documentation of all transactions is essential. This includes written agreements, interest rates (if applicable), and repayment schedules. Maintaining accurate and up-to-date records can be cumbersome. Using accounting software or services will make this process easier.
Other considerations for Director’s Loan Accounts
- Interest Rates: Determining fair and legal interest rates for loans is often a challenge. Consultation with financial experts can help in setting appropriate rates.
- Regular Review: Periodic reviews of Director’s Loan Accounts help in identifying any discrepancies and ensuring that the accounts remain in compliance with regulations. If the account is overdrawn, it is important to repay it within the 9-month deadline to avoid paying unnecessary tax. Speak to your accountant to make sure you understand any tax liabilities occurring from your director’s loan.
- Professional Advice: Seeking professional financial advice, such as from accountants or financial consultants, can provide valuable insights into optimising Director’s Loan Account management. Having an experienced accountant to help you navigate this ensures that you are compliant and have the cashflow to meet your goals.
Conclusion:
Director’s loan accounts are complex. For personal advice on borrowing money from your company or paying money to your company, ask an experienced accountant for bespoke advice for you.
If you’re looking for an accountant, fill out a discovery form and see if we’re the accountant for you. We ask for a few details about you and your business – such as turnover, number of employees and software you use. We will then contact you for a chat.