Whether you are a Director of a business, or a shareholder, you need to be aware of what a director’s loan account is, as well as your tax obligations.

Essentially, a director’s loan account (DLA) allows you to keep track of any money that you, or another shareholder, lend to your business or borrow from it.

This should cover any transactions taken out of a limited company which are not salaries, or business expense repayments.

Why would you need a director’s loan?

Depending on your personal finances, you may need to take out a loan from your business to support you.

When borrowing money from your business, you must consider how this will impact the company’s cash flow. If the business is in a weak position, taking out a loan could damage it further.

On the flip side of this, you can lend money to your business to cover necessary purchases, such as new equipment.

A loan to your business can also allow you to invest money in the business but ensure you are repaid when the business is able to rather than tying your funds into equity.

Are the loans taxable?

The way that the loan is taxed will depend on whether you owe the company money (the account is overdrawn) or the company owes you money (the account is in credit).

Overdrawn accounts

If you take out a loan from your company, and it is not repaid within nine months of the accounting period end, the company will be responsible for paying Corporation Tax.

The current rate for any new loans is 33.75 per cent, which is designed to be in line with the dividend tax rate.

This loan must be reflected on your company tax return and the company will have to pay Corporation Tax nine months after the end of your accounting period.

However, your company may be eligible to reclaim the Corporation Tax after the loan has been repaid, written off, or released. It should be noted that this doesn’t include any interest paid on the loan and we have seen the refunds take significant time to be processed by HMRC.

In the circumstance that you owe the company more than £10,000, and do not pay the market rate of interest, you must treat the loan as a ‘benefit in kind’, declare it on a P11D form, pay Class 1 National Insurance, and report the benefit on your Self-Assessment tax return.

More information on this can be found here.

Accounts in credit

If the company owes you money, Corporation Tax is not due on the loan.

However, if interest is charged, this counts as a business expense for the company as well as personal income for yourself.

Therefore, you must report this in your Self-Assessment tax return.

Your company must pay you the agreed interest rate, minus the Income Tax charged at the base rate. It must also report and pay this Income Tax every quarter through the CT61 form.

For advice on director’s loan accounts, contact our team today.