Our guide covers the essentials that you need to know about director's loan accounts, including FAQs, guidelines and tax implications.
As a limited company director, you can access the money in your company bank account through a facility known as a director's loan.
This can come in handy in instances when your personal finances are in need of a boost, yet taking out a director's loan is a decision that requires careful consideration. That's because there are tax and accounting implications, and it's best to speak to an accountant so that you fully understand the consequences.
But before you dive into the details, you'll need to have an understanding of the basics-such as what a director's loan account is, what the loan can be used for, tax rules you need to be aware of and more.
Here's where our guide comes in:
Understanding the basics of director's loans
What is a director's loan?
According to HMRC, a director's loan is defined as money taken from your company that isn't either of the following:
- A salary, dividend or expense treatment
- Money that you've previously paid into or loaned the company
What is a director's loan account?
A Director's Loan Account (DLA) is a record of all transactions between the company and its directors. It records not just the money owed by the directors, but also the money owed to them.
At the end of the financial year, the amount is recorded in the balance sheet either as an asset (money is owed by the director) or liability (money is owed to the director).
Who can take a director's loan?
As the name suggests, only directors of a company can take out a director's loan.
Can I loan money to my company?
You're also able to make a director's loan to your company. This may take place when a director wants to provide funding for the company's activities or for an asset purchase, but only on a short-term basis.
The loan may be made to the company with or without interest.
If interest is charged, this will be considered a source of income for the director, and must therefore be recorded on the director's Self Assessment tax return. Interest paid to the director is considered a business expense for the company.
What should a director's loan account contain?
A DLA should contain:
- Cash withdrawals and repayments made by its directors
- Personal expenses paid with company money or a company credit card
- Interest charged on the loan
What are director's loans used for?
You can draw your earnings as director's loans, and convert them to dividends and salary at a later point in time.
Director's loans are also used when you need to access money in your company - apart from what you take out as a salary, dividend or expense treatment - for personal reasons.
The money can be used for a variety of purposes, such as covering the costs of a home repair bill, travel plans or any unforeseen personal expenses that may arise.
Is a director's loan a benefit in kind?
A director's loan is considered to be a benefit in kind if the following conditions apply:
- The loan amount is £10,000 or more
- You're not paying interest on the loan
- The interest you're paying on the loan falls below HMRC's average official rates for beneficial loan arrangements
If these conditions are met, you're required to report and pay taxes on benefits.
You'll need to record the loan on a P11D form and on your Self Assessment tax return. Personal taxes may be due, and your company may pay National Insurance Contributions at a rate of 13.8% on the determined value of the benefits.
You or your company may have to pay tax on a director's loan, depending on the length of time that you've borrowed the money for, as well as the amount you've borrowed.
Length of time
You'll need to repay the loan within nine months and one day of your company's year-end.
If you're not able to do so, your company will be required to pay a Corporation Tax charge (known as S455 tax) at a rate of 32.5% on the outstanding amount.
1. You repay the entire loan within nine months and one day of your company's year-end
Your company won't pay any tax on the loan.
Here's an example: if you've taken out a loan on 15th March 2021, and the amount is still outstanding at your company's year end of 31st March 2021, you'll need to repay the loan by 31st December 2021 to avoid paying additional tax.
2. You repay a portion of the loan within nine months and one day of your company's year-end
Your company will be required to pay tax on the outstanding balance.
If the unpaid balance of the loan is £2,500, you'll pay additional Corporation Tax amounting to £812.50 (32.5% of the outstanding amount).
3. You fail to repay the loan within nine months and one day of your company's year-end
Let's say you've taken out a loan of £5,000 on 15th March 2021, and the amount is still outstanding at your company's year-end of 31st March 2021.
If this isn't repaid by 31st December 2021, you'll need to pay additional Corporation Tax amounting to £1,625 (32.5% of the outstanding amount).
Reclaiming Corporation Tax
S455 is considered a temporary tax, so it can be reclaimed once you've paid off the outstanding loan balance.
Do note that the repayment isn't immediate; the tax is repayable nine months and one day after the end of the accounting period in which the loan is repaid. Any interest charged on the Corporation Tax can't be reclaimed.
Your claim must be made within four years. The processes and documents for making a claim will differ depending on whether you're reclaiming within two years, or after two years of the end of the accounting period where the loan was taken. Further details on this is available on the HMRC website.
The amount borrowed
There isn't a limit to the loan amount that can be taken out.
However, if the loan amount exceeds £10,000, your company will need to treat the loan as a benefit in kind and deduct Class 1 National Insurance.
You'll need to report the loan on your Self Assessment tax return, and may have to pay tax on the loan at the official rate of interest.
Repaying a director's loan
'Bed and breakfasting'
It's best not to take out a loan right after you've repaid it.
That's because HMRC may view this as 'bed and breakfasting' - a tactic employed to avoid tax.
It's a practice where directors repay their loans to the company before the year-end to avoid penalties, but then take out the loan again shortly afterwards without truly intending to repay it.
Rules have been imposed to counter the use of 'bed and breakfasting' arrangements.
- When a loan of more than £10,000 is repaid by the director, no further loans exceeding this amount can be taken out within 30 days. If this happens, the full amount will automatically be taxed.
- The bed and breakfast rules will also apply if a loan of over £15,000 has been taken out by a director, and before any repayment is made there is an intention to take out a loan of more than £5,000 that isn't matched to another repayment.
What happens to an overdrawn DLA if the company goes into liquidation?
The liquidator can demand that the director repay the loan, so that the company's creditors can be paid.
Legal action can be taken against the director.
Can a director's loan be written off?
It is possible to write off a director's loan, yet there are tax and accounting implications to be considered.
We recommend discussing this with an accountant.