What is a Director Loan Account?
What does DLA mean?
Can a Director Loan Account be overdrawn?
What happens when a Director Loan Account is overdrawn?
How does a Director Loan Account work?
We get asked so many times to answer questions such as those above, and to explain what a Director Loan Account is, and how it works, that I thought I’d take five minutes to explain 😊
Do I have to open a separate Bank Account for my Director Loan Account?
No – it’s an accounting term
It’s not a physical bank account where real money actually goes in and out, but it’s how accountants ‘account’ for what you do with money in your business, because you’ve got to remember that as a limited company, you and your business are two completely separate legal entities.
So your money is not the business’s money, if that makes sense? When I say ‘you’ I refer to any Director / Shareholder of a Limited Company
This seems like a good time to insert a link to a recent YouTube ‘Short’ called ‘IT’S NOT YOUR MONEY!’ (and yes, those ARE shouty capitals!)
What does a Director Loan Account record?
The Director Loan Account records the money which you owe the company and need to pay back and/or the money that the company owes to you and that you can take back free of income tax when there is enough cash available in the business for you to do so
How will I know what is in my DLA?
When you look at your Director Loan Account transactions with your accountant – and every accountant should show you EXACTLY what they have put to your DLA so you know exactly where you stand, and can challenge how certain expenses have been allocated when appropriate!
When you look at your DLA transactions you will see that you have debits (DB) on the left hand side, and credits (CR) on the right.
The debits are what you owe to the company (think of debtors – they are the customers that owe the company money) and credits are what the company owes to you (likewise creditors are the suppliers who need to be paid by the company).
What specifically might be recorded on my DLA?
So for example, some business owners tell us that they take dividends every month of £1,000, which now that you have watched the videos above, you understand not to be the case, they are actually ‘drawings’
So these ‘drawings’ sit on the left hand side of the DLA until such times as you have turned them into a you dividend, which you do by holding a board meeting, completing minutes of said meeting and raising appropriate dividend documentation as per the agreed minutes.
Yes, there’s a lot of compliance and paperwork involved – You must make sure you’ve ticked all the boxes, dotted the i’s and crossed the t’s!!
What else might sit under Debits?
Things (or stuff as I technically call it in the first main video) which you have done which you’ve inadvertently paid for with business money.
Thinks we see most commonly are
- Personal shopping (you know, that time whenever you go into the supermarket, you’re shopping for home and you only have the business bank card with you – oops 😬)
- Or you’ve got your Amazon account mixed up and you’ve bought all that personal stuff on the business account
- Personal Tax liabilities which have been paid by the business on the director’s behalf (nope, not a business expense!!)
- Petrol or other fuel
- Apple or Netflix subscriptions
- Magazine subscriptions for home
- Uber Eats
- Share capital in the first year of trading
On the right hand side, owed back to you, you might see your salary or dividends if you haven’t actually drawn the money for those out of the business, as well as any capital introduced on starting your business.
Then there will be anything else which you might have paid for personally but which are actual genuine business expenses:
- Pre trading / incorporation expenses – that laptop that you bought just before you started the business you’ve introduced to the business
- Your mobile phone bill which you haven’t got round to moving, but you do use the phone for business
- Train tickets for that business trip when you forgot your card
And a few things which you may not have paid for at all, but which your accountant will include for you, such as:
- Business Mileage claims
- Use of home allowances
So that money is all owed back to you.
How do I know how much I owe or can take back?
You should examine your DLA on a regular basis – ideally as part of your monthly management accounts so you stay completely on top of this.
In reality, most business owners look at their DLA status only on an annual basis when their accountants present it to them.
What you will see is an opening balance on each side, totalled up, with the draft closing balance for discussion.
What happens if my DLA is ‘Overdrawn’?
If you owe money back to the business, your DLA is in Debit or ‘Overdrawn. Then your accountant will explain your options:
- Issue a dividend to clear the balance
- Assuming there are enough reserves in the business to do so
- Remember personal tax will be due on any dividend declared
- Pay what is owed or part thereof back
- Before the corporation tax payment deadline which falls nine months and one day after the company year end date)
- Not pay it back but pay Section 455 tax on the amount outstanding at 33.75%
- Increased from 32.5% from 2022-23 tax year in line with dividend tax increases
There are lots of rules and additional charges associated with overdrawn Director Loan Accounts which we will examine in a future article
What happens if my DLA is in credit?
If your loan account is in credit, it simply means that the company owes this money back to you.
If it’s not a significant amount in credit, you can simply draw this back at any time in the future when the company can afford to pay you.
Any money drawn in this way is NOT subject to income tax, as it was already your money in the first place.
However, if the company owes you significant funds, you may wish to charge interest on that loan.
HMRC are quite happy for Directors and Shareholders who loan their own business funds in this way to treat such as unsecured loans and charge an appropriate commercial interest rate of ca 5%, which is currently much more than you might receive investing it in any bank.
Again, there are rules around this – for example, you can’t just treat this as a savings account and pop some spare cash into the business simply in order to be able to charge interest – there must be a genuine business need.
And as ever there is complexity and paperwork, such as CT61 reporting and payment of any income tax due on the interest earned, which might outweigh the benefits for less significant amounts.
We will look at this in more depth later too…
For more from HMRC on Director Loan Accounts visit their guidance on running a limited company via the link below:
If you have any questions relating to your DLA, or if your accountant hasn’t ever explained this properly, please do contact us and we will be very happy to help – it’s easier than you may think to change accountants 😊