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Confused about your Director’s Loan Account?

Confused about your Director’s Loan Account?

Running a business can feel like a juggling act, and managing your company’s finances efficiently is crucial not only for your business’s success but also for your personal financial peace of mind.

One area that often trips up Limited Company directors (especially if you’re new to it) is the Director’s Loan Account (DLA). If you’re scratching your head wondering what exactly it is, how to use it, and what happens if it goes wrong – don’t worry! We’ve got you covered.

What is a Director’s Loan Account (DLA)?

In simple terms, a Director’s Loan Account is like a financial scorecard that tracks any money you borrow from or lend to your company. Think of it as the middleman that helps you keep track of the balance between your personal finances and the company’s finances.

Here’s how it works:

  • Money you take out (beyond your salary and dividends) goes onto the DLA as a loan.
  • Money you put in (say, if you lend your company some cash to keep things afloat) gets recorded in the DLA as a credit.

Please remember: Money you borrow from your company is technically a loan – and like any loan, it needs to be repaid within a certain timeframe to avoid tax complications. Sounds simple enough, right?

How (and when) can you draw money from your company?

There will probably be times when you need to draw money from the business, and you’ve got a few options for doing so:

  • Salary and Dividends: The most common ways to pay yourself. Your salary should be set according to your role in the business, and dividends depend on how much profit your company is making.
  • Director’s Loan: If you’ve already paid yourself a salary and dividends and still need a little extra, you may consider drawing a director’s loan. This must be properly recorded in your DLA.

When can you draw money?

While you can technically take money out at any time, there are a few things you’ll want to keep in mind:

  • Can the company afford it? Make sure the business has enough funds to lend you—taking too much out could leave the company in a tight spot.
  • Track your DLA balance: If you borrow more than you’ve put in, your DLA becomes "overdrawn." This is where HMRC might start paying attention.

The tax implications of an overdrawn director’s loan account

Ah, now we get to the fun part (not really) – the s455 tax. If your DLA goes overdrawn, you could find yourself facing an unpleasant surprise: the dreaded s455 tax charge. Here’s how it works:

What is the s455 tax?

If your DLA balance is negative (i.e. you’ve borrowed more than you’ve lent), the company will face a tax charge of 32.5% on the outstanding balance at the end of the accounting period. Yes, that’s a hefty tax, but don’t worry it’s not you personally paying it. The company foots the bill. Still, it can add some unwanted pressure on the business.

For example, if your DLA is overdrawn by £10,000 at the year-end, the company will need to pay £3,250 as an s455 tax charge. Ouch!

When is the s455 tax due?

The tax is due 9 months and 1 day after the end of the company’s accounting period. So, if your year ends on 31st March, you’d need to pay the tax by 1st January of the following year.

But here’s the silver lining: The s455 tax is refundable! If you repay the loan within 9 months after your accounting period ends, the company can claim back the tax paid. So, a bit of forward planning can save you some cash.

How to avoid the s455 tax

These are some ways to avoid S455 tax liability:

  • Repay the loan: The easiest way to avoid the charge is to repay the loan on time.
  • Take regular dividends: If the company is profitable, paying yourself dividends can be a good alternative to borrowing.
  • Keep an eye on your DLA: Regularly check your DLA balance to make sure you don’t accidentally end up overdrawn.

What happens if you can’t repay the DLA?

Life happens. Maybe the business is going through a rough patch, or maybe the loan’s just slipped your mind. If you can’t repay the loan, it’s important to address it sooner rather than later. Here are a few options to consider:

  • Repay via salary or dividends: If the business is profitable, you can pay back the loan by adjusting your salary or dividends.
  • Set up a formal loan agreement: If you’re not able to repay right away, you could set up a formal loan agreement with your company, with clear repayment terms.

Managing your DLA: Keep it simple, keep it smart

Managing your Director’s Loan Account is an important part of running a limited company, but it doesn’t have to be stressful. By keeping track of your DLA balance and staying on top of the repayment deadlines, you can avoid the dreaded s455 tax and keep both your business and personal finances in good shape.

At Panthera, we understand that small business owners have a lot to juggle – and that’s where we come in. If you need help navigating your Director’s Loan Account or just want to chat about your business finances, we’re here to help. Let’s make paying tax a little less scary together!

Moving to Panthera is easy

It’s a big decision to move accountants. We get it. That’s why we have a clearly defined process in place to make it as straightforward as possible.

Step 1: We have a short initial discovery meeting to understand your needs so we can create the perfect service package for your business

Step 2: You receive your tailored proposal with one simple monthly fee and you e-sign the letter of engagement

Step 3: You provide your current accountant with notice – and you leave the rest to us!

We liaise directly with your previous accountant regarding the transfer of information. We request authority from HMRC to act on your behalf. We handle as much of the admin as possible, so you can get on with running your business – safe in the knowledge that everything is going on in the background. And if there’s any action for you, we let you know.

Contact us to find out how we can help you

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