Director’s Loans Demystified: How to Keep More Money in Your Pocket
If you run an owner managed limited company, you might take money from the business beyond your salary and dividends. This is tracked in a Director’s Loan Account (DLA). While it might seem straightforward, if not managed properly, it can lead to unexpected tax bills.
In this blog, I’ll break down what a DLA is, the tax implications if it’s overdrawn or in credit, and share a real-world example to make it easy to understand.
What Is a Director’s Loan Account (DLA)?
A Director’s Loan Account (DLA) is simply a record of:
• Money you take out of the company that’s not salary, dividends, or expense reimbursements.
• Money you put into the company as a loan.
At the end of your company’s financial year, your DLA will show either:
• A debit (overdrawn) balance – meaning you owe the company money.
• A credit balance – meaning the company owes you money.
HMRC provides guidance on DLAs in the Company Taxation Manual (CTM61500): HMRC Manual on Director’s Loan Accounts
Real-World Example: Meet Sarah, a Freelance Designer
Sarah runs a single owner managed limited company. She pays herself a small salary and takes dividends when the company makes a profit.
One month, she needs extra cash, so she withdraws £12,000 from the company, planning to repay it later.
What Happens Next?
- Her DLA is now overdrawn by £12,000.
- Because it’s over £10,000, HMRC sees it as an interest-free benefit unless she pays interest at HMRC’s official rate.
- If she doesn’t repay it within 9 months of the company’s year-end, the company faces extra tax.
Tax Implications of an Overdrawn (Debit) DLA
1. Under Section 455 Corporation Tax (Company Tax Manual: CTM61600)
• If the loan isn’t repaid within 9 months of the company’s year-end, the company must pay 33.75% tax on the outstanding balance.
• The company can reclaim this tax once the loan is fully repaid, but it could take years.
Example:
If Sarah’s loan of £12,000 isn’t repaid on time, the company owes: £12,000 × 33.75% = £4,050 under Section 455 tax.
2. Benefit in Kind (Employment Income Manual: EIM26100)
If the loan is over £10,000 at any time during the year:
• The company must report it on a P11D form.
• The company pays Class 1A National Insurance (13.8%) on the benefit.
• Sarah will pay personal tax on the benefit through Self-Assessment.
How to Avoid This:
• Keep the loan under £10,000.
• If over £10,000, pay interest at HMRC’s official rate (currently 2.25% as of 2024).
Don’t Get Caught ‘Bed & Breakfasting’ (CTM61630)
HMRC frowns on repaying a loan just before the 9-month deadline and taking it out again shortly after (known as ‘bed and breakfasting’).
If the repayments and new loans are less than 30 days apart, HMRC may ignore the repayment and treat it as if the loan was never cleared.
What If the Company Owes You Money? (Credit DLA)
If you’ve put more money into the company than you’ve taken out, your DLA is in credit. This is good news:
- You can withdraw this money tax-free anytime.
- You can charge the company interest on the loan if you like.
Interest on the Loan (Savings and Investment Manual: SAIM1000)
• The company can deduct the interest as a business expense.
• You’ll need to report the interest as personal income on your Self- Assessment tax return and may pay tax on it.
Key Takeaways for single owner managed Companies
- Track your DLA carefully – don’t mix personal and business expenses.
- Repay overdrawn loans within 9 months to avoid the 33.75% Section 455 tax.
- Keep loans under £10,000 to avoid Benefit in Kind charges.
- Charge interest on credit balances for extra personal income (if you wish).
Need Help Managing Your Director’s Loan Account?
If you’re unsure how to handle your DLA or want to avoid unexpected tax bills, let’s have a chat.
Book a Free Consultation Now
I’ll help you make sense of your accounts, save on tax, and keep HMRC happy.