A director’s loan is money that is taken from the company that cannot be classified as a salary, dividends, or company expenses. It is money that is borrowed by a director of the company as a loan and that must be repaid.
This effectively makes the director a creditor of the company.
For a number of different reasons, there may be times when a company director debates whether to borrow money from the company or borrow money from elsewhere to fund the company. In either transaction, funds will be tracked and monitored using a Director’s Loan Account.
If as a director, you decide that the best option is to borrow money from the company, then there are some rules that must be observed. It will be worth using the following guidelines before borrowing –
- Take out director’s loans only when absolutely necessary
- Repay within nine months and one day of the company year-end if possible
- Borrow less than £10,000
- Loans of £10,000 or more must be reported on a tax return and must be treated as a benefit in kind
- Wait at least 30 days between loans
- Do not allow your director’s loan account (DLA) to be overdrawn for extended periods
- Be certain that your company has made a profit before declaring dividends
Although there are rules and limitations, a director’s loan can be a fast and convenient way of accessing funds for one-off expenses or short-term costs. As an emergency source of funds, this can be useful for managing cash flow issues, but director’s loans can come with risks like heavy tax penalties so they should be used only when necessary.
Director’s Loan Account
The Director’s Loan Account is the financial account used to keep track of the director’s loans and repayments. It shows loans given to the company or taken by the director. If the company takes more money from the director than is being loaned, then the account is in credit.
If the director is borrowing larger sums then the account will be overdrawn. This can be a red flag to shareholders and investors who may be concerned if the account is overdrawn for long periods of time. Good business practice is to ensure that the account remains in credit.
Interest payments
Interest on director’s loans is determined by the company. While there is no limit, any interest charged below the official rate may be treated as a benefit in kind by the HMRC for tax purposes, which means directors may be taxed on the difference between the official rate and the actual rate being paid.
Loan limits and repayments
There is no limit on the amount that can be borrowed by a director of the company, but anything above £10,000 will be treated as a benefit in kind and must be reported on a self-assessment tax return. Even though there is no limit to loan amounts legally speaking, directors will need to assess whether the company can bear the loan to avoid cash flow problems.
Any loan taken must be repaid within 9 months and 1 day of the company year-end or heavy tax penalties may be imposed. Once the loan has been repaid directors must wait for a period of 30 days before taking any further loans.
Lending to the company
If you are loaning money to the company for temporary reasons then interest may be charged. Any interest that the company pays to the director is considered income and must be reported on tax returns. The company will need to deduct income tax at source as the loan is classed as a business expense, but no corporation tax will need to be paid.
