Understanding tax and the Director’s loan account
It is entirely reasonable for business owners to assume that any money in their company’s bank account is theirs. However, there are significant tax consequences on how the funds are extracted. This is why the (often misunderstood) Director’s Loan Account (DLA), which is an account that records the transactions between the company and the director, is so important. Sean Hackemann, founder and director of Specialist Accounting Solutions, explains
HMRC says a director’s loan is when you, or close family members, get money from your company that is not a salary, dividend, an expense repayment or money previously loaned to the company.
Quite often the DLA is overdrawn at the end of the financial year, meaning that the director ‘owes’ money back to the company. If the amount borrowed is not paid back within nine months and one day from the end of the financial year, then the company is liable for an additional tax charge under section 455 CTA 2010 at a rate of 32.5%. For instance, if the DLA was overdrawn by £8,000 and not repaid, then the company would have to pay a tax charge of £2,600 (32.5% x £8,000) under s455.
How does the company legally avoid paying this tax?
The simplest solution is to make a cash repayment back to the company. If the company has sufficient distributable profits and the director is also a shareholder, then the company can declare a dividend. No cash changes hands, as this dividend offsets the cash already taken.
Furthermore, dividends must be paid proportionally to shareholdings.
If there aren’t enough distributable reserves, then you can either allocate unpaid salaries as a credit to the DLA or declare a bonus. There is more timing flexibility using a bonus, because it’s tax deductible for the company in the financial year it relates to, not when the payment is made.
Specialist Accounting Solutions is a niche firm of accountants specialising in advisory, virtual FD and financial outsourcing services. We work with ambitious entrepreneurs and management teams, who need specialist accountancy support to achieve their goals.
To discuss DLAs and your business, call us for a free no obligation consultation.