As the Director of a company, you may have found yourself wondering if you can borrow money from your company or how the amount of money you have loaned to the company is tracked. To find the answer you will need to check your Directors Loan Account (DLA). The DLA is quite straight forward once you get your head around it, but the company and directors will end up with more taxes due should it be used incorrectly.
What is the Directors Loan Account?
The DLA is a liability account that is used to record the financial transactions between a company and its director. These transactions are comprised of:
- Personal loans taken from the company
- Loans made to the company from the director
- Repayments of either of the above loans
- Personal expenses paid for by the company
- Business expenses paid for by the director
- Income from the company (Salary, Dividends, etc) and the corresponding payments of those amounts
- Other expense claims (mileage claims, use of home as office claims, etc)
Where one of these transactions benefits the director at the cost of the company a liability arises for the director to pay the company back for the amount they received, this produces a debit value on the DLA (it is said to be overdrawn) and vice versa when the company owes the director a credit value is produced on the DLA.
Why should you care?
Now you know what the DLA is and which transactions it records we can talk about what this means to you as a director and the company in the long term. When the DLA is in credit the director can withdraw up to the value of the DLA without incurring any charges to income tax or any other taxes for the company.
This isn’t the case however when the DLA is in debit. When the DLA is in debit (overdrawn) there is potential for company to incur a section 455 charge (S455 Charge) and a benefit in kind which is subject to National insurance and income tax.
Section 455 Charge
An S455 Charge becomes due by the company when the DLA is in debit at the end of the accounting period, and the full debit amount does not get repaid within nine months and one day of the end of the accounting period.
The S455 charge will be for 32.5% of the loan amount and will be due for payment alongside the corporation tax. It is also a temporary tax which means the amount paid by the company will be repaid back to the company when the loan is cleared by the director.
Benefit in Kind
The other charge that can arise when the DLA is overdrawn is a benefit in kind. This charge arises when the DLA is more than £10,000 in debit at any point during the tax year and the loan is provided at an interest rate below HMRC’s official rate, including interest-free.
To calculate the benefit in kind in the period we first determine the average loan by adding the balances at the start and end of the tax year and dividing by two. If the loan is new or repaid in the year, then we need to apportion the benefit based on how many complete tax months the loan was held for. Now that we have the average loan, we multiply by HMRC official rate of 2.25% and deduct any interest paid by the director to get the cash equivalent benefit in kind.
Now that we have the benefit in kind the company will report it on a P11D and pay national insurance at 13.8%. The director will also report the benefit in kind on their self-assessment tax return and pay income tax on the full amount.
The DLA is a useful tool that is used by both the company and the directors to make sure their financial positions are recorded and reported correctly and hopefully the above information has helped to increase your understanding of the DLA and what to look out for to prevent paying any large tax charges in the future.
It should be noted that the figures used in this article are correct for the 2020/21 tax year and therefore many not still be relevant depending on the time of reading this article.