A Director’s Loan Account (DLA) is “Money taken from your company’s accounts that cannot be classed as salary, dividends or legitimate expenses”. In many cases, Directors are unaware that even owe money to the company.
Until the money is repaid you/your company must pay:
• Corporation tax (32.5%)
• National Insurance (13.8%)
• Interest on the loan (2.55%)
• Income tax
Whilst a DLA is not illegal, if it is not paid back in time or your company enters insolvency, you could be liable for the value outstanding, including tax and interest. A Director’s loan must be repaid within nine months and one day of the company’s year-end, or you will face a heavy tax penalty. Any unpaid balance at that time will be subject to a 32.5 per cent corporation tax charge (known as S455 tax).
Here is a short summary of things to remember if you are considering borrowing money from your company or lending to it.
- Take out director’s loans only when absolutely necessary (i.e. explore all other options first)
- Repay your director’s loan within nine months and one day of the company year-end if possible
- Aim to borrow less than £10,000
- If you borrow £10,000 or more, you must report it on your self-assessment tax return and the company must treat it as a benefit in kind
- Wait at least 30 days between taking out different director’s loans
- If you lend to your company, ensure that both you and the company use the correct tax treatment
- Do not allow your DLA to be overdrawn for extended periods
- Be certain that your company has made a profit before declaring dividend