You may have heard the term ‘Director’s Loan Account’ mentioned by accountants or other business people. If you don’t really understand it, or you’ve not come across the term, here are the basics.
This blog is written with the following presumptions in mind:
- You are a small business limited company owner
- You are a director
- You are likely to be the owner/shareholder
What is a Director’s Loan Account?
One way to picture a Director’s Loan Account (aka a DLA) is like a bank account. It has a balance, and that balance can be either be positive or negative (like being in credit or being overdrawn in your bank account).
This balance is either:
- money owed to you as the director
- money you owe to the company
In your businesses accounts, it’s then either
- a ‘liability’ (money the company owes to someone)
- an ‘asset’ (something the company owns, in this case a sum of money due to it)
Are there limits to a DLA ‘balance’?
The short answer is no. There are tax consequences to having an overdrawn balance which we will touch on below.
So what actually goes in and out of a Director’s Loan Account?
In short, money to and from ‘you’.
In the small business world it’s often things such as:
- Money you take as the owner
- Personal expenses that business should not have paid for but did
- Money you put in
- Business expenses you’ve paid for yourself, and the company owes you the money back
We won’t go into too much detail here on the “money you take” part. Suffice to say that it is possible that if you only paid yourself exactly what your dividend minutes or payslip said, and everything matched, you don’t necessarily need it to go through this loan account.
In the real world, this isn’t usually the case. You will often see the transactions of the money you’ve taken, and then a credit for the money you are owed in dividend and salary.
You can see this in the DLA example below:
In this example, Dan has:
- Put in some money to start the business
- Declared a dividend but not taken the money at that date
- Taken out £5000, some of which is the dividend, some is from the money he put in
- Reduced the amount owed to him as he used the wrong card at a bakery buying the kids some cake
Practical Action Point:
If you have your book-keeping done for you on accounting software, you can go and check the transactions in your loan account.
Make sure they are not business expenses. In the past we’ve seen this Director’s Loan Account used as a bit of a dumping ground by some book-keepers!
If they are business expenses, get them reallocated.
Anything in a Director’s Loan Account is effectively saying ‘this is your personal money’.
So how does the tax work with a DLA?
At the point money is paid to you from a Director’s Loan Account, there is (usually) no immediate personal tax consequences.
However, if you have an overdrawn balance (i.e. you owe money back) 9 months after the company year end, there is a tax charge levied that your company has to pay.
As you can imagine, this tax charge is there to stop owners just borrowing money and never paying tax on it!
Obviously if you declare salary or dividend to clear the loan account/balance with what you’ve taken, those things will usually have a tax consequence.
We won’t go into the details here, but you can read further on this subject in our blog here.
You can see more on how to open and repay a Director’s Loan Account with our videos on our YouTube channel:
I’m still not sure about how to use a Director’s Loan Account
Ask your accountant for help, or book a consultation with us to help you make the most of your DLA. We offer a paid 1 hour, 1-2-1 consultation so you can ask simple questions of an accountant. You don’t have to become a client, so it’s a great way for you to get the help, when you need it.