When you run a limited company, as a director, you will need to be familiar with what a Director’s Loan Account (DLA) is, how it works and what it means for you.
This article provides a brief introduction to some of the main points around DLAs.
What is a DLA?
A DLA is a record of transactions between the company and its directors.
It is important to remember that whilst acting as a sole trader or partnership, the business’ funds are technically also your funds. On the other hand, a limited company is a separate legal entity, so any funds drawn from the company (taken as either cash/bank transfer or personal expenses paid by the company) will initially be allocated to a directors loan account. Likewise any funds introduced will create a credit on the directors loan account.
Often, as a director, you will put money into the company when it is set up. This is how a directors loan account is created. On an on-going basis, you may then draw your earnings as loans from the business, and convert them to dividends and salary at a later date. Operating an overdrawn loan account in this way can have tax advantages when used correctly.
What are the tax implications?
If your DLA is overdrawn at the date of the company’s financial year-end, there is a possible tax implication. If the entire director’s loan is paid back within 9 months and 1 day of the year-end, the overdrawn DLA tax will not be due. If it is not repaid, the company will pay additional Corporation Tax at 32.5% on the amount outstanding. This extra 32.5% is repayable to the company by HMRC when the loan is repaid to the company by the director.
If there is a balance on the DLA
If you owe your company over £10,000 (interest-free) at any given time, the loan is classed as a benefit in kind, which will result in tax implications for both you personally and the company.
If the DLA is in credit (i.e. the company owes you money), there is no tax due on this, and you can withdraw the balance from the company at any time without there being any tax implications.
Where do dividends and salary come in?
As we said earlier, on an on-going basis, you may draw your earnings as loans from the business, and convert them to dividends and salary at a later date.
What this means in practice is that you will draw down on your DLA as you take money out from the business, but the DLA will then be added to/credited by any salary declared for you and also any dividends that are voted.
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Please contact us to find out how the above applies in your circumstances, how you can reduce your tax liabilities and maximise your tax efficiency.
Please note that the above is for general information only and does not constitute financial or tax advice. You should not rely on this information to make or refrain from making any decisions. You should always obtain independent professional advice in respect of your own situation.
