A Director’s Loan Account (DLA) is a useful tool for construction business owners, but it can also be a financial minefield if not managed correctly. Mishandling your DLA can result in hefty tax bills or even personal liability if the business takes a downturn.
What Is a Director’s Loan Account?
A Director’s Loan Account is money taken from the business by a director that isn’t salary, dividends, or legitimate business expenses. Essentially, it’s a record of how much the company owes you, or how much you owe the company.
The Risks of Not Managing Your DLA Properly
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Tax Charges:
If a DLA is not cleared within nine months of the company’s year-end, it may attract a 33% tax charge. -
Personal Liability:
If the business goes under while there is an outstanding DLA, you could be personally liable for repaying the debt. -
Restricted Dividends:
Dividends can only be declared if there are sufficient profits. If profits drop unexpectedly, you could be left with a significant unpaid loan.
How to Manage Your DLA Effectively
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Regularly Clear the Loan:
Use dividends to clear the DLA before the deadline. -
Monitor Your Balance:
Keep track of your drawings and make adjustments as needed. -
Seek Professional Advice:
Consult a construction-focused accountant to ensure you’re managing your DLA in compliance with regulations.
Final Thoughts:
Director’s Loan Accounts can be a convenient way to access company funds, but only if managed correctly. Keeping clear, accurate records and making sure you clear the balance regularly will help you avoid unexpected tax charges and personal liability.
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