What Are Directors’ Loan Accounts (DLAs)?
Directors’ loans and directors’ loan accounts (DLAs) can be a complex area for small business owners. This guide breaks down what they are, their tax implications, and how to manage them effectively.
A director’s loan account (DLA) tracks financial transactions between a company and its director(s) that do not fall into these categories:
- Salary.
- Dividends.
- Expense reimbursements.
- Repayments of previous loans to the company.
For companies with multiple directors, separate DLAs must be maintained for each director.
DLA Balances
- Credit Balance: The company owes money to the director. No tax is payable.
- Debit Balance: The director owes money to the company, which could result in tax liabilities or be treated as an interest-free loan.
The DLA balance is reflected on the company’s balance sheet as either an asset or a liability at the end of the financial year.
What Should a Director’s Loan Account Include?
To ensure compliance and transparency, record the following in the DLA:
- Cash Withdrawals: Any money taken by the director that isn’t salary, dividends, or expense reimbursements.
- Personal Expenses: Transactions made using company funds for non-business purposes.
- Expense Reimbursements: Legitimate business expenses repaid to the director.
Accurate categorisation of these transactions helps to ensure the DLA is compliant and reflects the financial relationship correctly.
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Why Would You Take a Director’s Loan?
Directors’ loans can provide short-term financial solutions:
- Cover Unexpected Personal Expenses: When personal finances require immediate funds.
- Improve Cash Flow Flexibility: Directors can temporarily access surplus cash held by the company.
However, these funds remain the property of the company and must be repaid within specific timeframes to avoid tax implications.
Tax Implications of Directors' Loans
When Is Tax Payable?
If a director’s loan account is overdrawn at year-end, there are tax consequences:
- Repayment Deadlines:
- Repay within nine months and one day of the year-end to avoid additional tax.
- If not repaid, Corporation Tax of 33.75% (2022/23 rates) on the outstanding balance applies. This tax is reclaimable once the loan is repaid.
- Personal Tax:
- Directors may incur personal tax liabilities on unpaid loans at a rate of 33.75% (higher-rate dividend tax).
- Benefit in Kind (BIK):
- Overdrawn DLAs may be treated as a BIK, requiring the company to pay 15.05% Employers’ National Insurance Contributions (NICs).
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Managing Overdrawn Directors’ Loans
If your DLA is overdrawn, you can:
- Repay the Loan: Avoid tax by clearing the balance within the nine-month timeframe.
- Declare as Salary or Dividend: Convert the loan into income, ensuring compliance with PAYE or dividend rules.
- Plan Withdrawals: Work with your accountant to structure cash flow and prevent future issues.
Best Practices for Directors' Loan Accounts
- Maintain Accurate Records: Use accounting software such as Xero or QuickBooks to track all transactions.
- Separate Business and Personal Finances: Ensure clear distinctions to avoid compliance risks.
- Consult a Professional: Engage with an accountant to ensure tax obligations are met and DLAs are managed correctly.
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