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If you own a business, youu2019ve probably come across the term u201cdirectors loan account.u201d Directors loan accounts (DLA) are one of the many tax provisions that you should be familiar with when you start a business of your own. Thatu2019s especially true of DLAs, as, if done right, they can offer you personally some significant financial benefits and Services for Individual Taxpayers.
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If you own a business, you’ve probably come across the term “directors loan account.” Directors loan accounts (DLA) are one of the many tax provisions that you should be familiar with when you start a business of your own. That’s especially true of DLAs, as, if done right, they can offer you personally some significant financial benefits and Services for Individual Taxpayers. There are a variety of reasons why you might need a loan from your company, such as unexpected repair costs or even paying for a personal holiday trip. The most important thing to remember is that the loan was not subject to personal tax services or corporate tax, and HMRC does demand what is due!
What is a Directors Loan Account? A director’s loan account is not a real bank account, it exists only in your accounting records to keep track of the money flowing between you and the limited company. A directors loan account requires you to be a director of a company, as the name implies. You are borrowing from the company via the DLA when you take money out of the company that is not a loan repayment, expense repayment, salary, or dividend. Personal spending from the business bank account, cash withdrawals for personal use, or money transfers to your personal bank account are examples of this.
What To Keep In Mind About Directors Loan Accounts and Taking Money Out of Your Business Too Much Becomes a Benefit in Kind If your DLA account is overdrawn by more than £10,000, it’s considered a benefit in kind because you’re getting a loan with no interest. This must be declared on a p11d prepared by the company, and you must pay income tax on this benefit in kind on your personal tax return.
You May Owe the Company Money at Years’ End Dividends are paid from reserves as a return on investment, and they are paid after corporation tax. A dividend declaration can be used to settle a directors loan account that is still outstanding at the end of the year, but you must ensure that there is enough profit left over after taxes to settle the account with dividends. If you have an overdrawn director’s loan account and owe money, you must report it on your corporation tax return, and you may have to pay tax on it. The director’s loan includes what HMRC classifies as associates, which includes husbands, wives, civil partners, relatives, business partners, and investors.
Why Would I Need a Directors Loan Account? What happens if I owe money to my company? If you owe your company more than £10,000 (interest-free) at any time, the loan is considered a benefit in kind, and you’ll need to report it on a P11D because it’ll be subject to both personal and corporate tax. On top of that, you’ll have to pay Class 1A National Insurance on the entire amount. What if my business owes me money? Your company does not pay Corporation Tax on money you personally lend it, and you can withdraw the entire amount at any time, regardless of whether the company is profitable or not. There are specific rules governing the timing of repayments and any interest charged or received, which can result in a tax benefit for both the company and the director, with careful tax planning.
How Do I Set Up a DLA? Setting up – and then properly paying back – a DLA is something that should be left to an accountant, to avoid tax hassles for you or your company. Don’t have one yet? For more information on how a DLA could benefit your company, contact us here.
