What is a director's loan account?
If you put your personal money into your limited company, or withdraw money for personal use, and it isn’t a salary, dividend, or expense repayment, it’s called a director’s loan.
You’ll need to keep a record each time this happens. These transactions are what make up a director’s loan account.
Each director in the business has their own director’s loan account, which is shown separately on the company’s records.
If you use our Pandle cloud accounting software, a director’s loan account will be added for each director. A DLA in Pandle is used in the same way as a bank account, but shows how much the company owes to each director, or what the director owes to the company.
What can a director’s loan be used for?
Director’s loans can be used to loan money to the company, or borrow from the company.
Borrowing money from the company
Technically the money that you borrow from your company as a director’s loan can be used for anything.
In reality, it’s important to remember that there are serious tax considerations when you do this.
There might be times that you need to borrow company money to pay for unexpected personal bills, but ideally only on a short-term, one-off basis.
If you do need to borrow money from your company...
There’s no legal limit on how much you can borrow as a director’s loan.
- Consider how much you really need to borrow. If you borrow money that the company can’t afford, it could lead to cash flow problems for the business.
- If you regularly borrow money from the company, HMRC might decide that this should be treated as a salary, and ask you to pay income tax on it.
- If the total amount of everything that you borrow is more than £10,000 at any one time, it will be automatically treated as a Benefit in Kind (BiK). We explain what this means for you and the company later on in the guide, in the section ‘Tax you pay if your director’s loan is more than £10,000’.
Loaning money to the company
You might pay for specific items for your company using personal money, or even put funds into the company to help it get started or grow.
You and your company are separate legal entities, so the money you put into the business is treated the same as any other loan, and the company owes it to you.
What should I record in a director’s loan account?
Your director’s loan account should record every transaction which shows:
- Company money being withdrawn or used for personal reasons (that isn’t your salary or a dividend payment).
- Personal money that you use for the company, or put into it, including repayments you make to your director’s loan account.
These transactions might be in the form of:
- A cash transfer from the company bank account to a personal one, or the other way round.
- Using a company card to pay for personal expenses.
- Using a personal card to pay for business expenses. If you already owe the company for a director’s loan, paying for business expenses with your own funds reduces the loan amount that you owe.
As a general rule, anything that isn’t entirely and exclusively for the business is considered to be a personal cost, and can’t be claimed as a business expense. Make sure you record them in your director’s loan account!
What does it mean if my director’s loan account shows a balance?
If you use your director’s loan account, it will show a balance. This might be a:
- Debit (positive number) balance if you owe money to the company
- Credit (negative number) balance if the company owes money to you
When you owe the company money
A debit balance on your director’s loan account means that you owe money to the company. This should be repaid as soon as possible.
If the director is also a shareholder, this balance can be cleared as if it were a dividend, but only if the company made profits which allow this.
So, if the DLA is overdrawn by £5,000 (which means it would show a debit balance of £5,000), the company could declare dividends of £5,000 to clear the amount.
The director doesn’t actually receive another £5,000 payment, but the ‘transfer’ is shown in the company’s bookkeeping. The amount will be subject to dividend tax, which you’ll have to pay personally.
- The director’s loan account will be credited with £5,000 to reduce the balance to zero
- Dividends will be debited with £5,000
If you get to the end of your company’s financial year and the loan amount hasn’t been repaid or cleared as if it were a dividend, it might be subject to S455 Corporation Tax. We explain what this means in the section ‘Director’s loan accounts and tax’.
When the company owes you money
Director’s loan accounts can work both ways, and you can lend your personal money to the business if it needs it. If your director’s loan account shows a credit balance, it means that the company owes money to you.
This might be start-up money to get the business going, or funds that you put in at a later date.
The company won’t have to pay Corporation Tax on the amount that you lend to it, and you can take the money back at any time.
Can I charge my company interest on a director’s loan?
Yes, you can charge interest on money that you lend to the company. The interest payments will be considered a business expense for the company but:
- Your company will need to deduct 20% income tax when paying you the interest on the loan. These deductions need to be shown on a form called a CT61, and reported to HMRC every quarter.
- The remaining amount will be paid to you but will be classed as personal income, so you’ll need to include them on your Self Assessment tax return.
Director’s loan accounts and tax
Ideally, if your director’s loan account is ever overdrawn, you’ll repay it before the end of the company’s financial year. HMRC also refer to your financial year end as the end of your Corporation Tax accounting period.
There are tax penalties if you don’t repay a director’s loan within nine months and one day from the company’s financial year end.
This is because the amount you borrowed hasn’t yet been taxed, either through the company or your own tax return.
The way that HMRC deals with tax when directors take loans from their business depends on how much you borrow at any one time.
Tax you pay if your director’s loan is less than £10,000
If the total amount you borrow as a director’s loan stays below £10,000 in a financial year, then the tax that you pay depends on when you pay it back.
The key here is the nine months and one day window after the end of the company’s financial year.
When you repay your director’s loan
Tax the company pays on the loan
Tax you pay personally on the loan
If you repay your director’s loan in full before the end of the accounting period
The company doesn’t have to include it on the Company Tax Return, and won’t have to pay any Corporation Tax.
If you repay your director’s loan in full after the end of the accounting period, but before
nine months and one day after the end of it
The company won’t have to pay Corporation Tax, but the loan must be included in the Company Tax Return
If you repay your director’s loan after nine months and one day
Because this is considered money owed to the business, it’s classed as an asset.
This means that the company will pay a supplementary rate of Corporation Tax, called S455, at a rate of 32.5% on the amount that you owe.
When you pay back your director’s loan, that 32.5% can be reclaimed by the company from HMRC.
If you don’t repay the director’s loan, and don’t intend to.
The company will need to write the amount off. It won’t get any Corporation Tax relief for writing off the debt.
There are other tax and accounting considerations if this happens, so speak to an accountant!
You’ll pay Class 1 National Insurance on the amount through the company payroll.
You’ll also need to include the amount on your personal Self Assessment tax return, and pay income tax and NI on it.
You won’t get the tax back, even if you later repay the loan.
Tax you pay if your director’s loan is more than £10,000
If the total amount which you borrow from your company as a director’s loan goes above £10,000 at any point in a financial year, it’s automatically classed as a Benefit in Kind (BiK).
This means that both you personally and the company will be liable to pay tax on it.
- The company (which is technically employing you as a director) must complete a P11D to tell HMRC about the benefit. The company will then pay Class 1A Employer’s National Insurance on the total amount of the loan, at a rate of 13.8%.
- You’ll need to include the loan on your Self Assessment tax return.
What if I repay the loan before year end, then withdraw it again?
Paying back your director’s loan before year-end, only to withdraw it again after year-end has passed might seem like a terrific way to avoid tax. It really isn’t.
Bed & breakfasting, and the 30-day rule
This sort of tax avoidance is sometimes called bed & breakfasting (a name which also applies to buying and selling shares in a way which avoids Capital Gains Tax).
To block directors from using their director’s loan account this way, the government introduced a 30-day rule.
If you repay one loan to your company, you must wait at least 30 days before you’re able to take out another one.
If HMRC decide that the way you repay and withdraw money to and from your director’s loan account looks like tax avoidance – beware! There’ll be a bill for income tax and NI heading your way, and quite possibly some nasty tax penalties, too.