Most limited company directors have a director's loan account (DLA), but not everyone understands what it is. In this article, we will outline the main concept of the director's loan account and how it affects both you and your limited company.
What is a director's loan Account (DLA) and does every director have one?
A director’s loan account is a record of all transactions between the director (or close family members) and the limited company that fall outside salary, dividends, or expense repayments. Whether you draw down funds from your business account, introduce capital, or occasionally use the company card for personal expenses (not recommended!), these transactions all contribute to the DLA. If you don't engage in any of these activities, you most likely don't have one.
What does a balance on your director’s loan account mean?
Your DLA can be either positive (overdrawn) or negative (in credit), depending on whether you have borrowed from or lent to the company.
Positive/Overdrawn director’s loan account
If you have borrowed money from the company that hasn't been repaid, your DLA is overdrawn. Any borrowed funds not repaid within nine months of the accounting period are subject to the Section 455 tax charge (assuming the company is a ‘close company’).
Negative/In Credit director’s loan account
If the company owes you money, your DLA is in credit. This could result from funds you introduced into the business, business expenses you incurred personally but haven't been repaid for, or dividends that have been voted but not yet paid (only if you’re also a shareholder). This amount can be withdrawn from the company tax-free!
Section 455 (S455) tax: How is it paid and when?
S455 tax is calculated during the company's corporation tax computation and is at a higher rate of 33.75%. This is payable on the balance on your director’s loan account as of the end of your accounting period. This tax is due alongside your corporation tax bill, nine months and one day after the accounting period ends but, unlike corporation tax, it is a temporary tax charge. This means, once the loan is repaid, HMRC will pay it back.
Just because you have an overdrawn DLA doesn’t automatically mean you have additional tax to pay. In many cases, where the director is also a shareholder, dividends can be voted within the nine-month time frame, offsetting the loan balance.
Are there any other tax implications to a director's loan?
If at any point throughout the tax year you have an overdrawn DLA that exceeds £10,000, it can lead to personal tax implications. If the company does not charge interest on the loan, it is treated as a beneficial loan. This results in a benefit-in-kind, subjecting you to tax and national insurance contributions. Your company will also incur national insurance contributions on the benefit-in-kind and must submit P11D forms to HMRC.
What about salary and dividends?
Salary
Your salary is accounted for separately through the PAYE system. When you are transferred your wage, this doesn’t affect your DLA.
Dividends
Dividends don’t normally affect your DLA provided you draw down the funds once voted. However, if you declare a dividend but decide not to draw down the funds until a later date, the voted amount can be offset against your DLA.
Conclusion
As we’ve discussed, having a director’s loan balance isn’t always a bad thing, especially if it's in credit. Although an overdrawn director’s loan account may seem daunting due to the possibility of additional tax, this is not always the case.
As your accountant, we can recommend tax planning actions to avoid paying the higher rate of tax and make sure your company is running as efficiently as possible. Contact us today to find out what we can do for you and your business.
Author: Rachel Leckey
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