Directors loan account, what is it? A director’s loan account (DLA) records transactions between the director and the company. It is a record of either money lent to the company or borrowed from the company.
The tax treatment of these transactions depends on whether you have lent money to the company or are borrowing from it, as well as the amounts involved. Legally, you must maintain records of these payments, and it’s important that you do.
If you are using cloud accounting it will make the record-keeping much easier for you. So, keep this in mind if you are not using some software to do the bookkeeping.
Why would you have monies lent or borrowed from the company?
It’s not unusual for directors to occasionally cover personal expenses through the company. While it’s best practice to separate personal and business expenses for clearer financial analysis, we know that sometimes it fails.
Having a clear distinction between personal and business expenses can also reduce scrutiny from HM Revenue & Customs (HMRC), leading to fewer inquiries regarding personal expenditure paid by the company.
What’s more, promoting these best practices can significantly enhance the financial management of your company’s affairs. However, putting aside idealism, we recognise that many of you sometimes pay your expenses via the company’s bank account. If this does happen, you must ensure they are allocated to the DLA. There are tax consequences, too, which will also explore.
It’s also possible that you have lent money to your company. This could be due to cash flow issues caused by current economic conditions or because you are providing funds for new projects. Regardless of the reason, the company will owe you money, making you one of its creditors.
Why is it important to keep clear records of the DLA
Your company is a separate legal entity. This means the company’s funds are distinct from yours. The main ways to receive payments from your company are through PAYE (payroll), dividends, or a combination of both.
Did you know that the rules regarding remuneration planning have recently changed? As a result, the optimal tax position for planning your dividends and salary has also been updated.
If you haven’t already discussed this, reach out to your manager at Myers Clark. Give them a call, and they will be happy to guide you through the new changes. If you are not working with us, here’s how we work.
Tax implications of an overdrawn DLA
If you are overdrawn on your DLA, you can reap the benefits in the short term, as it will be a cheap loan. As money is lent via your company to yourself, you may decide not to charge interest or very nominal interest. However, you need to remember two things:
- If the balance is over £10,000 and remains outstanding as at the end of the tax year (5th April), you will need to declare it on form p11d (reporting benefits). There will then be some Employer’s National Insurance to pay on the interest element and the benefit will need to be declared on your own self-assessment tax return. The loan interest will also need reporting if at any point during the tax year the limit was exceeded.
So if you have an overdrawn loan account and have not prepared a form P11d get in touch with us now. We are in the P11d season now, and forms need to be submitted by July.
- If the balance remains outstanding as at nine months after the year end of the company’s accounting period, there will be a corporation tax charge of 33.75%. This the same rate as higher rate for dividends.
When you repay the money, HMRC will refund the corporation tax. However, you will need to apply for this refund online. This process can be cumbersome, so it’s wise to avoid getting into this situation in the first place.
Directors and shareholders often believe that there will be enough funds in the company to transform an overdrawn loan account into an actual dividend. However, paying dividends relies on profitability, which is not always clear without a solid set of management accounts prepared with the assistance of professionals.
It is important to keep accurate and detailed records, and we are here to help you do just that.
Lending money to your own company
If you have lent money to your own company, you can charge the company interest on that loan. This can be a good way to withdraw some funds from the company, but remember that the interest you receive is considered taxable income for you personally. You will need to declare this interest on your tax return.
However, the interest paid is a legitimate expense for your company and can be deducted for corporation tax purposes.
Managing loan accounts alongside cash flow and tax implications can be quite complex. That’s why we’re here to help. We are serious about you and your ambitions. If you haven’t started working with us yet, please email us at enquiries@myersclark.co.uk to find out how we can assist you.