Directors Loan Accounts & How to Use Them
What is a director’s loan accounts?
In the first stages of a startup companies’ existence, the lines between a director’s finances and the company’s finances can be blurry. Especially prior to incorporation when the company may not have a business banking facility, but expenditure needs to be made to get up and running. The movement of money between a director and the business creates a director's loan account (DLA) on the balance sheet where all the money a director has either borrowed from your company, or lends to it, is recorded.
In this week’s newsletter, our specialist accountants for startups look at exactly how a directors loan account functions, what it can help a director to achieve and tax planning opportunities that arise:
Overdrawn
In instances where a company has an overdrawn DLA, there are tax implications if the loan is not repaid within 9 months of the company year end.
The company will be liable to pay s455 tax @33.75% (increase to the dividend upper tax rate from 6th April 2022) on the balance of the loan. e.g., a £20,000 loan would equate to a tax liability of £6.5k, which is payable with the Corporation Tax return.
If you pay back the entire director’s loan within nine months and one day of the company’s year-end, you won’t owe any tax.
There are also further implications if the loan exceeds £10,000 as interest will be charged on the loan, increasing the amount the director owes, or the loan will be considered a BIK and added to the director’s personal income.
Any s455 tax paid to HMRC is recoverable when the loan is repaid.
Credit
Where the loan is in credit, the company will have a liability shown on the books to the directors. This is not necessarily considered a bad thing.
Having a credit DLA presents tax planning opportunities and therefore depending on the circumstances we would not recommend this is repaid to the director unless it is needed.
The director is eligible to charge interest on the loan to the company at say 10% per annum which will be a deductible expense for the company.
Tax on the interest will be stopped and paid over to HMRC by the company via a CT61 form with the net interest either paid to the director or added to the loan.
The interest is then added to the directors’ personal tax return but because of the quirks in the tax system, it is likely the tax stopped at source by the company will be partially refunded or in full depending on the director’s income.
Using your directors loan account to your advantage can really assist SMEs making the most from their business and maximizing the income they can draw from the company in the most tax efficient way possible. If you'd like to discuss this with a tax advisor at Dragon Argent, schedule a discovery call with us now.
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