A director’s loan account (DLA), also known as a director’s current account is a loan that subsists between the director(s) and a company.
In many small and medium sized companies directors will also be shareholders, therefore they have a variety of options on how to draw income from the business.
Most business owners will want to draw a regular and similar amount each month or week from their company to cover normal personal expenditure. Due to the tax savings most business owners will not draw this as a monthly salary, and they may not want to declare dividends that often due to the paperwork.
Until you turn your drawings into an actual form of taxable distribution either by raising a dividend or running a salary, the payments made create a loan between you and the company. That loan is then cleared down with dividends every so often.
Most small and medium sized business owners will also take a small salary each year to cover the personal allowance, national insurance contributions (for state benefit and pension entitlement) to optimise their tax saving. This salary can also be offset with the loan.
A typical loan may look something like this, with the company year end of 31st December. Assuming the director withdraws the net wages from the small salary each month separately.
Date Transaction Amount Running balance
30/01/2022 Director drawings £3,000 £3,000
28/02/2022 Director drawings £3,000 £6,000
30/03/2022 Director drawings £3,000 £9,000
30/04/2022 Director drawings £3,000 £12,000
30/05/2022 Director drawings £3,000 £15,000
15/06/2022 Dividend raised £(20,000) £(5,000)
30/06/2022 Director drawings £3,000 £(2,000)
30/07/2022 Director drawings £3,000 £1,000
30/08/2022 Director drawings £3,000 £4,000
30/09/2022 Director drawings £3,000 £7,000
30/10/2022 Director drawings £3,000 £11,000
15/11/2022 Dividend £(11,000) £0
30/11/2022 Director drawings £3,000 £3,000
30/12/2022 Director drawings £3,000 £6,000
The loan balance between the company and the director at the year end is £6,000. Showing that until a dividend is raised to clear this, the director owes that money back.
Tax Consequences of Director’s Loans
A director’s loan needs to be cleared within 9 months of the year end. Usually by declaring a dividend or paying the money back (there are rules with matching so you can’t pay it back then withdraw it again straight away). You basically need to turn the loan into something that you can be taxed on personally, such as a salary or dividend.
If the loan is not cleared within 9 months of the year end then HMRC will charge the company tax at 33.75% of the loan. This tax is called S455 Tax.
Once the loan is repaid or cleared that tax is refunded by HMRC. HMRC raise this tax to stop directors taking loans from their company as income rather than declaring a salary or dividend which is taxable on them personally.
Interest
Interest also has to be charged on director’s loans if it goes £10,000 or more overdrawn in the year. If it goes over £10,000 and interest is not charged then this is seen as a taxable benefit in kind, and must be declared on a P11D along with costs such as medical insurance and company cars.
The current official rate of interest on director’s loans approved by HMRC is 2%. This interest is added to your loan increasing the amount due to the company, and the dividend needing to be raised.
If you stay on top of your dividends, or declare dividends before you draw money from the company then this will reduce the interest charged.
How should I take money from my business?
The answer to this can vary greatly depending on you and your company’s circumstances. Please contact us here if you would like to optimise the way you draw money from your company.
