Director’s Loan Account Rules: What every Director needs to know

Did you know that misunderstanding Director’s Loan Account rules is one of the most common causes of tax and cashflow issues for small companies and their Directors?

A Director’s Loan Account (DLA) records money you take from or lend to your company outside of salary or dividends, such as expenses you pay for the company, cash withdrawals, or loans between you and your company.

At GLX, we regularly speak with directors who are surprised to learn just how easy it is to fall foul of DLA rules. We understand that running your business is your priority, but understanding how much you can withdraw as a business owner is crucial.

Here are some Director’s Loan Account rules to be aware of:
– Taking out more money than you’ve put in creates an overdrawn DLA. This means you owe money back to the company. If you don’t repay the overdrawn amount within 9 months after the company’s year-end, the company faces a Corporation Tax charge of 32.5% (known as Section 455 tax).
– Loans under £10,000 can be interest-free. For loans above this, interest must be charged. If not, the difference is treated as a benefit in kind and reported on a P11D, potentially creating a personal tax liability.
– Repaying the loan within the deadline avoids the Section 455 charge. The company can reclaim this tax if repaid later, but this can create cash flow challenges.
– Writing off the loan or treating it as a dividend can trigger further personal tax implications.
– Regularly documenting and reconciling your DLA helps prevent surprises and ensures your accounts are accurate.

HMRC monitors Director’s loans closely and may impose penalties for non-compliance, so making sure you are well informed will help you avoid any issues in the future.

If you’re unsure about your Director’s loan or need help managing withdrawals and tax effects, contact GLX to discuss your situation and we will guide you every step of the way.