What is a Directors Loan Account and How To Use One
What is a directors loan account (DLA)? How do I use a DLA? Also, how do find out how much is in my DLA? Then what happens if I don’t repay my DLA? These are all questions every company director should know the answers to. If not, read below.
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Directors Loan Account
What is it?
A DLA is where you categorise non-business transactions between a company and its director. The balance in a DLA shows how much the company owes the director (credit balance). Or how much the director owes the company (debit balance). If a director owes money to the company, you can call this an overdrawn directors loan account.
How do I find my DLA balance?
If you use online accounting software (you should!), run a report called a Balance Sheet or Trial Balance. You should find a line for the Directors Loan Account, or Shareholders Loan, or Owners Funds. or something like that. On a Trial Balance, if it’s in the debit column, that’s bad – you owe the company money (overdrawn DLA). If it’s in the credit column, the company owes you money, which is good. On a balance sheet, if it’s a positive balance in the Creditors/Liability section, that’s good. But if it’s positive and in the Assets/Debtors section, that’s bad. Obviously, reverse those if the balance is negative.
If you don’t use online accounting, you’ll have to take the DLA balance from the last set of accounts prepared, then adjust it for all the DLA transactions since then. Good luck! Did we mention online accounting?!
Tax on an Overdrawn Directors Loan Account
It’s important to know how to record a DLA properly and to check its balance. The reason being, is that an overdrawn DLA at a year end can cost the company 33.75% tax (was 32.5%) on the balance. So, let’s say a director owes money to the company at the company’s year end. The director has 9 months following the year end to repay the loan back to the company. If it’s not repaid, the company will pay tax at 33.75% of the balance still owed to it 9 months after the year end. A company receives a refund of that extra tax, 9 months after the year of repayment (or reduction).
Another tax implication, is if a loan to a director (or any employee) exceeds £10,000. If it does, interest needs to be charged at the official HMRC rate. Otherwise, that loan is taxable on the director as a ‘benefit in kind’ and they’ll pay 20% or 40% tax on the interest that should be charged.
How do I use a Directors Loan Account
Company transactions
If a company makes a payment to a director, that is not wages, expenses or dividends, because it’s not for a company cost, categorise the payment to the DLA (debit).
Also, categorise a payment/bill (debit) to the DLA if the company pays for something on behalf of the director because that’s like giving the director money. For example, personal expenses put on a company credit card.
You should categorise income (credit) to the DLA if the company receives money on behalf of the director because that belongs to the director not the company.
If you don’t pay the full amount of dividends directly to a director/shareholder, you should categorise them (credit) to the DLA. The transaction date becomes the dividends payment date.
Director transactions
If a director pays out of their own pocket for the company’s costs, or incurs expenses on behalf of the company, the company should debit the expense category and credit the directors loan account.
If a director receives income on behalf of the company, the company should record that amount as a credit against sales/vat/debtors and a debit against the DLA.
Actual loans between the director and the company are also DLA transactions. So categorise them to the directors loan account.
Online Accounting Software
Recording a Directors Loan Account is easy when you use online accounting software. There are many other benefits to using online accounting software which you can read about here. We are Xero Accounting specialists but we don’t make you use any particular software – choose your favourite! We can also help you use your choice of online accounting software to record a DLA. See some other online accounting software we support and you can see our fixed fees here.