If you run a limited company, you’ve probably come across the term director’s loan account. It’s one of those things that sounds more complicated than it is, but it’s also one of the areas where getting things wrong can lead to a nasty tax surprise. So it’s worth understanding properly.
Here’s what you need to know, in plain English.
What is a director’s loan account?
A director’s loan account, or DLA, is simply a record of all the money that passes between you as a director and your limited company. This doesn’t include your salary, dividends and legitimate expense repayments.
Think of it as a running tab between you and the business. If you take money out of the company for personal use, that goes on the director’s loan account. If you put your own money into the business, that goes on there too. Every director has their own individual account.
It’s important to understand that money in your limited company belongs to the company, not to you personally. Your salary and dividends are the proper ways to pay yourself. Anything outside of that needs to be recorded and accounted for correctly.
What counts as a director’s loan?
A director’s loan is not the same as your salary, expenses, dividends, or repayment of money you’ve previously lent to the company. Those all have their own separate treatments.
A director’s loan is specifically money you borrow from the company for personal use, or money you put into the company from your own pocket. Both need to be recorded carefully.
What are the tax implications?
This is where it gets important. If your director’s loan account is in credit, meaning the company owes you money, there are no tax implications. But if it’s overdrawn, meaning you owe the company money, HMRC takes a close interest.
If your director’s loan account is overdrawn at your company year end and you haven’t repaid it within nine months, the company faces an additional tax charge of 33.75% on the outstanding amount. That’s on top of any other tax you might owe personally.
An overdrawn director’s loan account is treated by HMRC as an interest free loan to the director. If the loan exceeds £10,000, it needs to be reported on a P11D and can result in additional National Insurance for the company.
There are also rules around repayment. You must wait at least 30 days between repaying one director’s loan and taking out another. HMRC is wise to attempts to repay just before year end and immediately borrow again, and has rules specifically to prevent it.
The tax implications here are significant enough that it’s always worth getting advice before your director’s loan account becomes overdrawn, not after.
What about record keeping?
You’re legally required to keep accurate records of everything that goes through your director’s loan account. This includes all cash withdrawals from the company, any personal expenses paid using company money, and any money you’ve lent to the business personally.
Your accounting software should track this automatically if it’s set up correctly. If you’re not sure whether yours is, that’s worth checking with your accountant. HMRC can and does ask to see these records, so keeping them accurate and up to date matters.
For further detail on HMRC’s own guidance, the HMRC director’s loan accounts fact sheet is a useful reference.
How to keep your director’s loan account in good shape
The simplest approach is to make sure you’re paying yourself correctly through salary and dividends rather than dipping into the company account informally. If you do need to borrow money from the company, keep the amount manageable and have a clear plan to repay it within the nine month window.
Reviewing your director’s loan account regularly, rather than just at year end, means you can spot any issues early and deal with them before they become a tax problem.
How Fresh Clarity can help
Director’s loan accounts are one of those areas where having an accountant who keeps an eye on things throughout the year makes a real difference. We flag issues before they become costly, make sure your account is being recorded correctly, and help you understand the tax implications of any money moving between you and your business.
If you’d like to find out more about working with us, get in touch and we’ll be in touch for a chat.