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What is a Directors Loan Account?

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The Directors Loan Account (DLA) is an account that reports amounts due to/from the director. Any transactions made to/from the director are recorded here along with any business expenses paid by the director personally.

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Directors Loan

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If the balance of the DLA shows a loan from the director to the company, the balance loaned to the company can be repaid to the director immediately tax-free (assuming there are funds in the company bank account).

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Overdrawn DLA

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If the balance of the DLA shows a loan from the company to the director, this is referred to as an 'overdrawn' DLA. An overdrawn DLA happens when all of the following conditions apply,

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1. You withdraw funds from the company leaving insufficient funds to cover all business creditors (entities the business owes money to) such as HMRC (corporation tax) 

2. You did not previously loan these funds to the company

3. The withdrawn funds cannot be declared as a dividend due to the company having insufficient retained profits

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An overdrawn DLA is not illegal, however it may give rise to the following,

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• Benefit in Kind (BIK) - If the loan is greater than £10,000 a benefit in kind will arise on the cash equivalent of the amount of interest that would be payable at the official rate of interest (2.25% - 23/24). The BIK will not arise if the director is paying interest on the loan at the official rate of interest.

• Tax under s455 Corporation Tax Act 2010 - If the DLA remains overdrawn nine months after the company accounting period, s455 CTA 2010 provides for a tax charge at the rate of 33.75% on the lower of the amount outstanding at the year end, and the amount outstanding nine months after the year end. This amount is payable even if the company is making a loss and there is no corporation tax due. Tax payable under s455 is a temporary tax and it is repayable to the company by HMRC nine months after the end of the accounting period in which the loan was repaid. Once the loan is repaid the tax effect is nil; however, the time lag between the loan being repaid and tax being refunded can place a significant strain on the company’s cash flow.

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