What is the Directors Loan Account?
At certain times you may lend your company money from personal funds, such as a capital sum to start the company, amounts to cover business costs if the company is currently making a loss, or for business costs which are paid personally on a regular basis as mileage, subsistence, or travel expenses, which have not yet been reimbursed.
The above examples would add up to leave a balance, or sum owed to you personally by the company known as a ‘Directors Loan Account’.
In practice the Directors Loan Account (DLA) acts like a bank account, which at the end of the year or period can be in credit, meaning the company owes you money, or in debit, meaning you owe the company money.
If you have a positive balance, the funds can be withdrawn from the company at any time, with no tax implications, as long as the cash is available in the bank. Many directors choose to be reimbursed monthly from the company, guided by our financial report as to the amount which is currently available to draw.
However, if a company has been running at a loss for some time, it can be many years before the cash is available in the bank to repay the Director.
What if I the account is in debit?
HMRC defines a Directors Loan Account as money taken from your company which is not:
- A salary, dividend or expense repayment
- Money you’ve previously paid into or loaned the company.
Business expenses are expenses which are ‘incurred wholly, exclusively and necessarily in the performance of duties of the business’, so if you have withdrawn funds for any other reason, then they meet the criteria of a ‘personal expense’ and should be recorded in the DLA.
If you have drawn too much out of your company, it leaves a debit balance, known as an ‘Overdrawn Directors Loan Account’. This usually means you have drawn out all available dividends, any loans previously made to the company, all reimbursed expenses, and more, effectively drawing out funds which should ideally be put aside in a company tax savings account, ready to pay corporation or direct tax liabilities.
It is good practice to ensure your account does not go overdrawn, and that your account has a small credit balance, particularly at the account’s year end, otherwise it can attract taxes of 32.5% on any balance which is not repaid in full within nine months and one day of the financial year end.
Our monthly financial reports help keep you on track with this, showing the amount currently available to take as a dividend without going overdrawn.