A director’s loan account (DLA) records when you choose to take money out of your business in a way that isn’t accounted for by salary, dividends, or expenses.
When you take money out of your business in this way, it is classed as a loan.
This can be a great way to access large amounts of money when needed, but there are vital tax implications to consider. If you are not careful, you could see yourself facing hefty fines for non-compliance.
If your director’s loan is paid back, then you do not usually need to pay Income Tax on the loan. This is because the tax liability of this will sit with your business.
You will need to pay Income Tax on loans that are not repaid due to being written off or released.
In these instances, you should report your director’s loan via Income Tax Self-Assessment (ITSA) and pay Income Tax on the loan. This should also be put through your company’s payroll for Class 1 National Insurance (NI) deductions.
A BIK is a benefit received by an employee or director that is not included in their salary. It is typically provided to individuals for free or at a reduced cost.
A director’s loan will be classed as a BIK by HM Revenue & Customs (HMRC) if it exceeds £10,000 and is free from interest.
In this case, you will need to report your director’s loan once again via ITSA and have your business deduct Class 1 NI Contributions.
Director’s loans are liable for Corporation Tax if a loan or advance has been made to the Director or shareholder of a close company. This is under Section 455 CTA 2010.
A close company must be a resident in the UK and controlled by either:
In these situations, the company rather than the participator is liable for the tax on the loan. Therefore, you should report the loan to HMRC by using form CT600A.
It is also important to repay the loan within nine months of the end of your business’ accounting period to avoid additional tax.
After the loan has been repaid, your company can reclaim Corporation Tax.
Your business will not have to pay Corporation Tax if:
To keep your director’s loans fully compliant, you must keep detailed records. These records must include any money that has been withdrawn or paid into your business, as well as any tax paid and details of written-off loans.
Keeping records ensures that you can provide HMRC with all the information that they need and prove that you have remained compliant.
If you need advice on director’s loans, get in touch with our team today.
