Director Loan Accounts

10 May 2017

Director Loan Accounts

A Director Loan Account (DLA) (or director current account) is the name used to cover money a director of a limited company takes out of the business for any other reason than as a salary, dividend or repayment or money that they have put in. If your company has multiple directors then it is always best to keep separate accounts for them to avoid confusion.

Credit Balance

A DLA is credited whenever the company owes the director for something he/she has paid for personally which is for business use.

For example, Director A pays £500 cash for a new office PC out of his own pocket – the effect is that the director loan account is credited by £500.

The director can then withdraw this £500 tax free at any point.

A director may also put in £10,000 of his own money to fund the business. The company legally owes the director this money so he can withdraw it tax free at any point (providing sufficient funds in the business bank account!).

Debit Balance

Remember that in the eyes of the law, the director and the limited company are two completely separate legal entities.

If you end up taking a loan from your company then the DLA account will have a debit balance, which means that you will need to pay this money back to the company (with a few caveats).

HMRC consider any money drawn out not classified as dividends or salary as a director loan.

The money can be paid back by either:

  1. Transferring personal funds into the business bank account
  2. Declare a dividend in the accounts and instead of transferring the money to your personal bank account, offset it against the outstanding director loan account.
  3. Offset the amount borrowed by crediting the account with reclaimed expenses and don’t withdraw the money from your business bank account.
  4. Paying tax on the whole outstanding loan amount when closing the company

Tax Implications

Section 455 Tax Charges

If there is still a debit balance (director owes the company money) at the year end and your business has less than five shareholders or directors (known as a close company) then there is a 32.5% tax charge on the total balance.

For example, Director A has a debit balance DLA of £11,000 at the year end – he/she will need to pay (£11,000 * 25%) £2,750 extra Corporation Tax to HMRC. The good news is that this is only a temporary holding tax.

If, after the company year end, the director has repaid the loan before 9 months & 1 day there is no S455 tax charge required. This scenario would apply if a company year end was 31 March 2017 but the director had repaid the loan in May 2017. The accounts would be prepared up to 31 March 2017 and the loan would be shown as outstanding, however we know it has been repaid within 9 months so we don't need to apply S455.

It is important to notice timing differences of repayments in terms of cash flow. If the loan was repaid a couple of years later (maximum period is 4 years) then S455 would be reclaimable 9 months and 1 day after the accounting period in which the loan was cleared. So for example:

31 March 2017 - outstanding £11,000 DLA on which S455 was paid

31 March 2019 - outstanding DLA paid back to company. S455 would be able to reclaimed 9 months and 1 day after this, so early January 2020.

Benefits In Kind

If the debit amount of the loan is greater than £10,000 then national insurance in the form of a Benefit In Kind (BIK) will need to be paid on the balance of the loan account. This is calculated as:

Outstanding DLA Balance * HMRC Official Interest Rate = BIK.

BIK* 13.8% = Class 1 NIC payable

We know that the official HMRC interest rate is 3.25% for 16/17 and if we use the example of an £11,000 overdrawn director loan account the calculation is as follows:

£11,000 * 3.25% = £357.50.

£357.50 * 13.8% = £49.36 Class 1 NIC payable via P11d

Self Assessment Tax

There is also an income tax charge via Self Assessment on the value of the BIK. If you are a normal rate taxpayer this will be 20%, but if you are higher rate 40% will apply. Using our £11,000 example, a higher rate taxpayer would be charged £357.50 * 40% = £143.

Total cost to borrow £11,000

S455 Tax (reclaimable) – £2,750

Class 1 NIC Charge – £49.36

Self Assessment Charge – £143

Total cost: £2,942.36 (of which £2,750 is reclaimable)

Do you want more information about director loan accounts?

Follow this link to contact the team at Source Accounting to find out more