What Is A Directors Loan Account And How Does It Work?

If you’re looking to raise funds, a director’s loan could be the solution that you’re looking for.

But.. opening a director’s loan account (DLA) might not be the right choice for everyone. When it comes to financing, loans are just one of the available options on offer.

To make sure you’re making the right choice, we’re here to answer what is a directors loan account, why you might need it and what else you need to know before taking one out.

Right, let’s get started then shall we?

What you'll get from this page:

What is a director’s loan account?

A director’s loan account is an account that keeps track of all the money you owe (or are owed) via director’s loans. This is where you borrow money from or lend to, your company.

A director’s loan account will have a simple overview of all director’s loans and the amount that is overdrawn, or in credit. For example, let’s say that Abby is the director of an events business. She takes out £5000 from the company to help fix the roof of her home, which has just started leaking.

By taking out that money, Abby’s director loan account will be £5000 overdrawn.
The following week, Abby is able to pay back £2000. Her account is now £3000 overdrawn, rather than £5000.

There are certain events where a director may want to lend money to the company instead. If this happens, the account will be in credit – meaning they owe you money. We’ll cover which situations this may happen in and how it works later on in this article.

Lost the buzz for your business?

Starting a business is exciting. Succeeding is rewarding. The bit between is hard, repetitive, and full of self-doubt.

The Lonely Middle Club (From Business4Beginners) helps you through it:

Get support and advice from other small business owners

Remove the self-doubt that’s holding your business back

Learn techniques and strategies to grow your business faster

Be inspired with our exclusive ‘swipe’ file and AI-powered tools

No pressure – work at YOUR pace, towards YOUR goals

Find Out More

—

Everything you need to know about taking out a director’s loan

Director’s loans are a way to borrow money from your company, and can be taken out at any time. If you want to take one out, this is all the key information that you need to know if you want to take one out.

1. You need to keep records

Any money you borrow from (or pay into!) your company must be recorded in a director’s loan account. At the end of the year, the balance must be submitted as part of your annual accounts.

2. You can only have one loan at a time

You can’t take out multiple director’s loans. There’s only one account and one loan that you can take out. However, there is no legal limit on how much you can borrow, but you should think about how the loan will affect your business’s cash flow. There’s no point in taking out a loan of £15,000 if it prevents your business from running.

If you borrow more than £10,000, you have to treat the loan as a ‘benefit in kind’. This means it must be reported on your self-assessment tax return and could be subject to extra tax. Amounts over this amount tend to need approval by your shareholders as well.

3. Director’s loans can be used for (almost) anything

As long as you’re not using the money to set up an illegitimate lending business (i.e. becoming a loan shark), you can use the money for pretty much anything. That includes paying the bills, buying a dream holiday, or having a lavish wedding.

You can also take out loans for your immediate family members. For instance, you could take money out to help pay for your daughter’s university fees.

4. You’ll get a heavy tax penalty if you borrow for more than 9 months

Although director’s loans don’t have a time limit, they should really be paid within 9 months and one day of a company’s Corporation Tax anointing period. If you don’t pay the money back in this time, you’ll get a heavy tax penalty of 33.75% on any unpaid amount (32.5% if it was made before April 2022).

5. Director’s loans have a (somewhat) flexible tax rate

You can choose the interest rate you pay on your director’s loan. However, before you get excited, that doesn’t mean you can take out a completely interest-free loan from your company.

If you charge less interest than the official rate, it will be treated as a ‘benefit in kind’. This means that you’ll be personally taxed the difference and need to report it on your self-assessment tax return. You’ll also have to pay Class 1 National Insurance on the full value of the loan.

6. There’s a cooling-off period between loans

You must wait a minimum of 30 days after repaying a director’s loan before you can take out another one.

This is to stop people from committing tax fraud, known as ‘bed and breakfasting’. This is where the director pays a loan off just before the nine-month deadline to avoid Corporation Tax, only to retake the same amount out again after the deadline. If you start a history of repeat lending, you may get investigated by the HMRC to check that you’re not guilty of this.

Using dividends over director’s loans

A directors loan is very different from paying dividends. Make sure you understand the difference.

Dividends are another way that you can get paid money from your company. But they work in a very different way to director’s loans, so it’s important to understand the difference between the two if you’re looking for ways to make some extra money.

A director’s loan is money your company gives you temporarily, which needs to be paid back to the business.
A dividend is a lump sum of money that’s paid to its shareholders on a regular basis. This is profit-based and does not need to be paid back.

Dividends can be paid from any limited company to its directors or shareholders. Dividends can only be paid out to shareholders if a company has made profit – so if your company hasn’t made any, you can’t pay dividends.

Interestingly, if a profit has been declared by mistake and you are paid a dividend, this is treated as an ‘accidental’ director’s loan. The amount must be paid back and recorded in your director’s loan account.

Find out more about how dividends work in the UK here.

FREE Download:

The Business Success Planner

Set clear goals for your business

Plan and manage your time more effectively

Brainstorm ideas and log inspirations

Stay motivated and encouraged

DOWNLOAD NOW

What happens if you loan money to your company?

As we mentioned earlier, you can loan money to your company instead of taking it out. This is good for those that want to raise quick capital for their company to cover an expense, such as investing in new equipment.

Again, the interest on this is up to you. Any interest that you do make has to be considered personal income and must be recorded on your self-assessment tax return.

The interest that the business pays is treated as a business expense, which means they must also deduct the basic rate of 20% income tax.

Director’s loans: a tax breakdown

We mentioned earlier that you set the interest rates (within reason) on director’s loans.

Generally speaking, if you’ve borrowed money from the company, your obligations depend on when you paid it back, as this table below shows.

Paid within 9 months of the end of your Corporation Tax accounting period.	Pay Corporation Tax at 33.75% of the original loan (or 32.5% if it was made before April 2022). This can be claimed back once the amount is repaid.
The loan isn’t paid within 9 months of the end of your Corporation Tax accounting period.	Pay Corporation Tax at 33.75% of the outstanding amount (or 32.5% if it was made before April 2022). Interest will be added until the Corporation Tax or loan is repaid. The Corporation Tax can be reclaimed once the debt has been cleared, but the interest cannot be reclaimed.
The loan is written off or released.	Class 1 National Insurance might be deducted through the company’s payroll. You will also need to pay Income Tax on the loan through a self assessment tax return.

Find out more details about your obligations on the Gov.uk website.

If you’ve lent your company money, your company does not pay Corporation Tax. However, any interest on the loan counts as both a business expense and a personal income. This means you must:

Report the income on a personal self-assessment tax return.
Report the Income Tax for your business every quarter to the HMRC, using form CT61. This can be requested online, or by calling the HMRC.

If you have a director’s loan that’s either been repaid, written off or released, you can reclaim the Corporation Tax. However, you can only reclaim the corporation tax itself – not any additional interest on the tax.

To reclaim this tax, you need to file a claim to the HMRC within 4 years of the full amount being repaid. For the first two years, you can reclaim this by using form CT600A to claim when you prepare a Company Tax Return for that accounting period or amend it online.

If it’s been more than 2 years, you’ll need to use form L2P. This can be posted directly to HMRC, or submitted with your next Company Tax Return. If you wait more than 4 years, you’ll lose out on your tax here.

Any corporation tax will not be rapid until 9 months and 1 day after the end of the Corporation Tax accounting period when the loan was settled.

Sound confusing? The best bet is to leave it up to your accountant, who will be able to fill in the right forms and ensure that you’re able to reclaim the right amount, at the right time.

If you haven’t got an accountant yet, make sure you follow our 5 questions to ask when hiring an accountant to make sure you get the right match.

Need help keeping your books in order?

Business accounting is not an easy task. But if you add in director’s loans, you can quickly get over in your head.

To make the process easier and to help keep your records straight, there’s accounting software. Accounting software is designed to automatically calculate your finances and track the money coming in and going out of your business.

This software can let you upload and store receipts from your phone, send invoices to your clients and prepare your returns instantly. That’s a lot of stress and worry solved quickly.