Limited companies are a separate legal entity to the people that own and run them, so there are strict rules around the different ways you can take money out of the company.

Director’s loan accounts (DLAs) are one of those areas that can get a bit confusing, so if you’re a company director it’s important to understand how director’s loan accounts work, and what this means for tax.

What is a director’s loan account?

The money in a limited company belongs to the business, but if you’re a director you may be able to withdraw cash as a director’s loan. This is when you take money from your company which isn’t:

• The salary you receive as a company director
• Dividends paid from the company’s profits
• To reimburse you for a business expense which you paid for using your personal money
• To repay money you paid into or loaned to the company

You’ll record these withdrawals as transactions in your director’s loan account, with a separate account for each director in the business.

What should I show in a director’s loan account?

Your director’s loan account shows the money you withdraw from the company for private use (other than your salary or any dividends), or personal funds you pay in as a loan or a repayment.

The transactions might take place as a bank transfer from the company’s account to your personal one, a personal purchase you made using the company card, or company expenses which you paid for using your own money.

If the overall balance of your director’s loan account shows a:

• Debit: The balance is a positive number, and you owe the company
• Credit: It’s a negative number, and the company owes that amount to you

So, if your director’s loan account is a debit balance because you owe your company money, and you use your own money to pay a business expense, the amount that you owe is reduced.
 

What can I use a director’s loan for?

Technically you can borrow money from your limited company as a director’s loan and use it for anything, from unexpected car repairs to a holiday. There are tax considerations around using a director’s loan account though, so it’s usually better if these are short-term, one-offs.

How much can I have as a director’s loan?

There isn’t any restriction on how much you can withdraw from the company using your director’s loan account, or how often, but:

• Borrowing more than the company can afford could disrupt cash flow
• If the total amount of your director’s loan goes over £10,000 at any point, HMRC will automatically consider it to be a Benefit in Kind (BiK)
• You or your company might need to pay tax depending on how much you take, and how frequently

When do I need to repay a director’s loan?

Ideally, you’ll repay money you take out as a director’s loan within the same accounting period that you took it out, otherwise you or your company may need to pay tax on the amount. We explain how this works in the section called ‘Do I need to pay tax on a director’s loan account?’

Can I cancel out a director’s loan with a dividend?

Yes, if you’re a director and a shareholder, then the money you owe to the company could potentially be cleared as a dividend if there is enough profit to do so.

Do I need to pay tax on a director’s loan account?

Taking a director’s loan might mean that you or your company needs to pay tax, depending on when it’s repaid and how much you take.

Paying tax if your director’s loan is more than £10,000

If your DLA is more than £10,000 it automatically becomes a Benefit in Kind – sometimes known as a P11D benefit because you’ll need to report it to HMRC using a P11D form. You’ll pay income tax on the value of the benefit, and your limited company (as your employer) will make National Insurance contributions.

As long as the total amount of your director’s loan is below £10,000 during the financial year, then any other tax on it depends on when you repay it (if you do).

• Within the same accounting period (the period covered by your Company Tax Return) that you took it out
• After the end of the accounting period, but within 9 months of that period ending
• The loan is still outstanding after 9 months and one day of that period ending
• The company writes the loan off (or goes into liquidation when you haven’t repaid it)

You pay it back in the same accounting year that you take it out

If you fully repay a director’s loan in the same accounting period that you took it out, your company won’t pay Corporation Tax on it, and won’t need to include it in the Company Tax Return. The accounting period is the time period covered by the Company Tax Return.

Can I withdraw it again afterwards?

There’s nothing to stop you, but be aware that there are rules in place designed to minimise the risk of tax avoidance.

This is because companies pay a special rate of Corporation Tax on the outstanding amount of a director’s loan if it isn’t repaid within nine months following the end of the year in which it was taken out. You’ll sometimes hear this called a Section 455 or S455 tax.

Before new rules were introduced, directors could dodge this by repaying the outstanding balance of their director’s loan account just before the due date, only to withdraw it again immediately afterwards – a practice known as ‘bed and breakfasting’.

To prevent this, if you repay more than £5,000 to your director’s loan account, taking a further loan over this amount within 30 days will incur Corporation Tax at 33.75%.

You repay your director’s loan after the end of the accounting period, but within 9 months of it ending

OK, so you didn’t repay your director’s loan in the year that you took it out, but you did repay it within 9 months of that year ending. You’ll need to show the amount which was owed at the end of the year on your Company Tax Return, but the company won’t actually need to pay Corporation Tax on it.

There are two exceptions to this:

• The loan amount was more than £5,000, and you took another loan of £5,000 or more either 30 days before you repaid it or 30 days afterwards
• The loan amount was more than £15,000, and you arranged another withdrawal on your director’s loan account when you repaid it

Trigger either of these two, and your company will pay a special rate of Corporation Tax called a Section 455 charge (sometimes known as S455 tax). This is charged at a rate of 33.75%, but the company can reclaim it once the original loan is repaid. You’ll only be able to reclaim the tax, not the interest.

The loan is still unpaid 9 months after the end of the accounting period

You didn’t repay the loan in the accounting period that you took it out, and it’s still outstanding 9 months after the end of that accounting period.

You’ll need to show the amount owed on your Company Tax Return, and the company will pay S455 Corporation Tax at 33.75%. HMRC will also charge the company interest until the Corporation Tax is paid. Your company will be able to reclaim the tax that it pays, but not the interest. Just be aware that reclaiming S455 tax isn’t quick!

Your company writes off your director’s loan

If your limited company ‘writes off the loan’, or there is another reason for not repaying it, such as the company going into liquidation, then you’ve basically received untaxed income. As such, your company will make Class 1 deductions through the company’s payroll. You’ll need to declare the amount on your Self Assessment tax return, and pay Income Tax on it.

Can I lend money to my company?

Your director’s loan account isn’t just for withdrawals – it can also be used to loan money to your company. You might put the money in at the start to help the business get going, or it might be something that you do later to support the company or to fund growth.

Will my company pay tax on money I pay in as a director’s loan?

Unlike most other forms of income, your limited company won’t need to pay Corporation Tax on money you lend to it through your director’s loan account.

You can take the money back at any time, but you might need to pay tax if this means that your director’s loan account is overdrawn at year end. You can also charge your company interest on the loan amount although there are tax implications around this.

 
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