September 2018 - GM Professional Accountants

Director’s Loan Account.

If you run a limited company, there are a few financial things you need to understand to help you run your company better. One of these things is the director’s loan.

According to Her Majesty’s Revenue and Customs, a director’s loan is any money which you take from your company which is not;

Your wage, expense refunds and dividends.
Funds you have previously loaned or paid for your company.

accountants for limited companies

Even though the money that is in your company’s bank account is not technically yours, you can have access to it through the director’s loan account.

Any time you withdraw money for any other reason, that money ought to be recorded in your DLA. Depending on your activities, when your company’s financial year comes to an end, the company will be owing you money or you owing the company money. This should be noted as a liability or an asset in your company’s annual accounts balance sheet.

The contents of a DLA.

These are the things included in a DLA;

All cash withdrawals that you made from the company as its director.
Individual expenses which you paid using the company’s fund or a credit card.

Business expenses are the type of expenses that might be incurred exclusively, entirely and necessarily during the executions of your employment duties. Anything else that does not fall under this is therefore a personal expense. Your director’s loan account should include evidence of all transactions which involve your finances, together with the company’s as well, to make sure that it will stand up to HMRC’s scrutinies.

Running your own limited company is to some extent risky, and that is the reason why HMRC will keep your director’s loan account under review through the yearly tax returns of the company to make sure that rules and regulations are followed to the latter.

Who is eligible to apply for a director’s loan?

Just as the title suggests, in order to be eligible to take a director’s loan from your company, you first need to be a director. There are several reasons why you would take a loan from your company, the important thing to know is that that loan has not been subjected to the company’s or your personal tax. If you pay the whole loan back 9 months to the year-end of the company, you will not owe any tax. However, if your DLA gets overdrawn at your company’s year-end, then you will be forced to pay tax.

For example, if you get a loan in March 2017, and the year-end for your company is April 2017, then you will have to pay back the loan by February 2019. It is important to know that any overdue director’s loan account will have to pay the tax at 32.5%.

Is it important to record the director’s loans?

When you started your limited company, you established it as a legal entity, so it is essential to remember that your relationship with your company is legally separated. This means that your company has its own statutory duties and responsibilities, that is the reason why any amount withdrawn ought to be recorded.

What if you owe your company money?

The moment you owe your company 10,000 or more, that loan is automatically classified under benefit in kind. Furthermore you will be forced to record it on aP11D since it will be liable to both your company’s and your personal tax. Other than that, you will also pay a Class 1A National Insurance at a 13.8% rate on the whole amount.

A written off loan.

The moment that your company decides to write off your loan you will need to consider taxes and accounting, it is advisable to consult an accountant so that he can help you decide on the next course of action.

Monitoring of the director’s loans by the HMRC.

It is part of HMRC’s job to monitor all the DLA’s which are frequently overdrawn. Sometimes it is possible for them to come to an agreement that the money should stop being a loan and make it your salary instead, therefore it is strongly advised that you regularly monitor your director’s withdrawals to make sure you don’t go beyond the 10,000 thresholds.

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