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What is a director’s loan account?

Anyone who is running a limited company has a significant amount of admin to stay on top of, and that includes your director’s loan account. Find out everything you need to know about director’s loan accounts with our helpful guide.

Director’s loan accounts explained

A director’s loan account is the means through which you can access the money in your limited company’s bank account. You, as director, exist as a separate entity to your business and its funds.

This is a positive thing in many ways, meaning that your personal and business finances aren’t intertwined, making it a popular choice of business structure compared to being a sole trader.

However, it also means the money in your business bank account doesn’t belong to you, and you need to take extra steps if you want to spend any of it, i.e., a director’s loan account.

Director’s loan account example

A director’s loan account can only be used by a person who is named as a director of the company who owns the bank account. You can access these funds without a loan for the following everyday business reasons:

  • Salary

  • Expenses

  • Dividends

  • Reclaiming money that you previously put in

However, anything else will appear as a DLA (director’s loan account) and must be paid back when it comes time to balance the books.

Here are some example scenarios for why you may need to use a director’s loan account:

  • Needing to boost your personal finances

  • Needing to cover unexpected expenses like a car breakdown

A director’s loan account requires a lot of admin, especially when it comes to tax, so it’s not recommended you take one out lightly. You must also wait 30 days between repaying one director’s loan account and starting another. This activity is also viewed with suspicion by HMRC who may tax you double if they believe you are trying to dodge tax. In short, a DLA is a useful tool for tough times, but definitely not one to use regularly.

Can a director’s loan account owe me money?

Yes, it is possible for you to add money to an account as well as take it out, and in these cases, you will be owed by the account rather than the other way around:

  • A director’s loan account in debit means you owe the company money because you took money out.

  • A director’s loan account in credit means the company owes you the amount of money you previously put in.

  • An overdrawn director’s loan account means more money has been taken out than can be paid back. 

Do I need to pay tax on a director’s loan account?

So long as any loans are paid back within nine months and one day of the year end, you will not owe tax. Otherwise, you may have to pay additional corporation tax. You may also face a higher rate of personal tax as well. Any loan over £10,000 will also be taxed, and needs to be recorded as benefits in kind, i.e., perks you have received from the company on top of a salary.

HMRC may also decide that a DLA is a salary rather than a loan and tax it accordingly. Before you go ahead with a DLA, you should consult an accountant for professional advice, as even if you are paying money in, you may want to consider charging interest and this will need to be recorded on your Self Assessment.

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