A director’s loan account (DLA) allows directors, or their family members, to take money out of their company. To qualify as a “director’s loan”, this money must not be a salary, a dividend, or an expense repayment. Also, it must not be money you’ve previously paid into or loaned to the company.
How Does A Director’s Loan Account Work?
As a director, you must keep detailed records of any money you borrow from or pay into the company. A DLA is a record of all the cash withdrawals you’ve made from the company, along with all personal expenses you’ve paid for with your company’s money.
By “personal expense”, we mean any expense you did not incur exclusively and wholly for business purposes. You must record and, ultimately, pay back any company money you use for personal expenses.
At the same time, your company’s accounts must clearly record any money you withdraw and pay back.
With a DLA, by the end of your company’s financial year, any money you owe to the company will be shown as an asset in the balance sheet. But any money the company owes you will be shown as a liability.
Learn more about expenses you can claim as a company director.
You Must Repay Director’s Loans
You should consider any money you borrow from your company to still belong to your company. This means you must pay it all back, even if you become insolvent.
If sufficient funds are available, and if you’re a shareholder, you could offset your DLA through declaring it as a dividend at the end of the company’s financial year. But in all other cases, you must repay your director’s loan.
Director’s Loans Over £10,000
If you’re not yourself a shareholder, your company’s shareholders must give their explicit approval for any director’s loan of £10,000 or more. If you do not get this consent, taking your loan may be considered a misfeasance, or as theft.
Do You Pay Interest on Director’s Loans?
Director’s loans may be subject to interest. You’re obliged to pay any interest on your loan that may be due. Also, if you charge interest on any loan you make to your company, you must declare this interest as part of your income.
Do You Have to Pay Tax on Director’s Loans?
You may also have to pay tax on your DLA. And if you’re a shareholder as well as a director, your company may have to pay tax too.
Your tax responsibilities, and your company’s tax responsibilities, will vary depending on whether your DLA is overdrawn (in which case you’ll owe the company money), or in credit (in which case the company will owe you).
Any director’s loan you take is taxable if it is not repaid within the current tax year. You can repay it, or part of it. In the new tax year you can then take the loan back out again.
Read a full guide to the tax implications of DLAs on the government’s website.
What Happens to Director’s Loans if Your Company’s Liquidated?
If your company enters liquidation proceedings, the liquidator may wish to pay the company’s creditors through collecting any money you owe the company. To achieve this, they may take legal action against you. And if you cannot afford to repay your loan, you may face personal bankruptcy.
Specialist Cover for Company Directors
Directors and Officers insurance can cover damages and claim expenses associated with claims made against you as a company director for alleged wrongful acts.
Read more about how Directors and Officers insurance works, and what it covers.
If you have any questions or would like to discuss your options, please contact our Tapoly team at info@tapoly.com, call our helpline on +44(0)207 846 0108 or use the chat box on our website.