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What Is a Director’s Loan Account?

When you are running a company, there are many pieces of legislation that are important to be familiar with. Some of these you may have heard of but don’t fully understand. One of the more technical items of tax legislation is a director’s loan account (DLA).
Here, we will take you through the technicalities and uses of a director’s loan account to make your life a bit easier.

What is a director’s loan account?

A director’s loan account (DLA) is a record of any money that a director borrows from or pays into their company. This loan is separate from the director’s salary and company dividends and would be used, for example, if the director lends their company money to fund day-to-day trading so that company does not need to liquidise assets. If you are a company director, then you will be eligible for a director’s loan account.

What are the rules for a director’s loan account?

Once a loan has been made in either direction, the DLA automatically becomes a listed company asset, so it is important to keep this record up to date. Larger loans to the director of over £10,000 may need stakeholder permission. If the loan is over £10,000, it is treated as a benefit in kind and national insurance is deducted.

What happens when you have an overdrawn loan account?

Having an overdrawn loan account occurs when the director is in debt to the company. This is not a problem provided that the director pays the company back within nine months and 1 day of their year end. If the loan is not repaid within nine months, then it will be viewed as director income and is therefore taxable along those lines. If this happens, the company will be required to pay corporation tax of 32.5%.

This is paid back by HMRC once the loan has been repaid and a claim for the refund must be filed within four years. However, it does result in a temporary loss of money for the company which is worth avoiding!

How do you repay a director’s loan?

There are multiple ways to repay a director’s loan. One way to pay the DLA back is by using dividends that the director receives at the end of the year. By paying back the DLA in this fashion, it means money does not need to be transferred in and out of the business and is a neater option. Equally, the director’s salary can also be used to pay off the loan, or the director can simply transfer money back into the company account at a suitable time.

Whilst directors’ loan accounts may not be the most exciting thing in the world, it is important to know how they work. We hope this has given you an insight into how to successfully use a DLA and repay a director’s loan.