What Is a Director Loan Account? Explained

What Is a Director Loan Account? Explained

As a director of a company, you might be asking yourself whether you should loan money to your company or borrow money. If you find yourself asking this on a regular basis, this guide is for you.

In this article, we discuss what director loans and director loan accounts are, as well as the interest and tax implications of taking out director’s loans. If you run a small business and want to learn more about this important bookkeeping topic, we recommend reading on.

What’s a Director Loan Account (DLA)?

A Director Loan Account (DLA) is where a company can log the money both lent and borrowed from the director.

When the director has borrowed more than the company is apparently lending, the account is overdrawn. This can potentially be a bad position for the company accounts to be in.

On the other hand, if the company has lent more than the director has borrowed, the account is in credit, and this is a much safer position to be in.

When DLA’s are overdrawn, shareholders have the right to be concerned, and this is something to be aware of as a director.

Why Directors Borrow from Their Company

There are a number of reasons why directors borrow money from their company, these include for their own use, making charitable donations and paying an illegal dividend.

For Own Use

Directors use company money when purchasing various items, these can include personal expenses such as lunch or dinner, haircuts or buying petrol. If the company bank card is getting use on a regular basis, it’s important to track the total figure carefully in order to avoid any complications further down the line.

Making Charitable Donations

Directors may also choose to make charitable donations in their own name using business funds. These donations can be of significant value, so they need to be monitored closely.

Paying an Illegal Dividend

If the company hasn’t made any profit during the financial year, and the director pays themselves a dividend, this becomes illegal. When this happens, the dividend amount is added to the Director Loan Account and will need to be repaid in 9 months.

What Interest is Paid on a Director’s Loan?

It’s at the company’s discretion as to what interest rate it charges on director loans.

However, it’s worth noting that if your company charges a rate that’s lower than the official interest rate, the following discount may be treated as a benefit in kind by HMRC.

If this happens, as a director, you’ll most likely be taxed on the difference between the interest rate that you’re paying and the official rate.

How Much Can I Borrow in a Director’s Loan?

The short answer is that there isn’t a legal limit of how much a director can borrow from their company. The problem is that it can get out of hand quite quickly if a director abuses this power.

Two key things to consider are:

  • How much can the company realistic lend a director?
  • How long can you afford to be without the funds used in the DLA?

If both of the above points are taken into consideration, the Director’s Loan should be in a healthy position, not causing the company any bigger issues down the line.

What are the Tax Implications of a Director Loan Account?

Claiming Back Corporation Tax on Overdue Director’s Loans

If things don’t go smoothly, you might be facing a situation where you’ve taken longer than nine months to pay off your director’s loan and have subsequently been charged corporation tax on the unpaid amount.

The problem for most companies here is that you can only start claiming this tax back nine months after the end of the accounting period in which you paid it off, and this can end up being a long time.

Potential Solution

One potential solution to this is delaying the payment of your corporation tax bill until the director’s loan has been paid. With the corporate tax payment deadline being nine months after the financial year-end, you’ll have extra time to repay the loan.

Director Loan Accounts with Q Accountants

If you’re looking for advice on how to manage your Director Loan Account, or have questions around best practices with regard to director spending, we recommend speaking to one of our expert team members.

We have a wide breadth of experience working with directors of SME’s, helping them to manage their DLA effectively.

Book a discovery call

Frequently Asked Questions

  1. How Soon Must I Repay a Director’s Loan?

    A director’s loan needs to be paid within 9 months before the end of your Corporation Tax accounting period.

  2. Can I Lend Money to My Company?

    Yes, directors can lend money to their company and this becomes part of the director loan account. When you lend money to your company, the company does not pay Corporation Tax on the money you lend it.

  3. What Happens If I Take Out a Director Loan by Accident?

    Yes, it’s possible to take out a director loan by accident. This is done when a director pays themselves an illegal dividend when their company hasn’t made any profit during that financial year. This dividend is then treated as a director’s loan and is then recorded in the DLA.

    If this happens, ensure that you pay this amount within the specific 9-month deadline.

  4. Can I Take out a Director’s Loan After Repaying One?

    If you’ve recently paid off a director’s loan, you will have to wait a minimum of 30 days before taking out another one.