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
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.
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.
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Our sole trader vs limited company calculator shows how much tax you can save trading as a limited company. The link to our sole trader vs limited company tax calculator is below. Just complete the first 3 boxes, then go down and click calculate my tax. But first, remember there are factors other than tax to consider when comparing a sole trader vs limited company. See below for most of these factors.
Still Save Tax Despite The Dividend Tax
Dividend taxes increased in April 2016 by 7.5%. This slightly reduces the tax savings made by incorporating. However, you still save tax trading as a limited company until profits are very high. Also, you can save even more tax using a company by splitting the ownership of it. Then you can split the dividend income you take from the company. For example, if you and your spouse own 50% each you would normally share the income 50% each.
Dividend taxes increased by a further 1.25% in April 2022. But self-employed national insurance also increased 1.25%. So it made no difference to how much you can save by trading as a limited company.
Let’s look first at the different types of business structure you can choose.
This is the simplest form of business to start. You simply carry on business on your own account. As a sole trader you pay income tax and Class 4 National Insurance on your net profit. You can employ people including your spouse. But you must only pay them for the value of the work they actually perform.
A partnership is two or more people carrying on business together with a view to making a profit. The partners in a partnership are all joint and severally liable for partnership debts. So if anything goes wrong, each partner’s personal wealth is at risk. Personal tax bills are based on the share of partnership profits. It is advisable to have a partnership agreement to document the business arrangement between the partners. This would include how you share profits and how partners will join and leave the partnership. Even a husband and wife partnership should have a written partnership agreement. You can use this to show HMRC that both parties have a right to share the profits.
A limited company is a separate legal entity from its owners. These are the basic facts…
- The limited company owns the business, not you.
- The company must have at least one shareholder.
- Also, it must have at least one director. But, there is no longer a requirement for private companies to have a company secretary.
- The shareholders do not have to be directors, but they usually are also directors in small companies. A company must treat directors as employees of the company. But they do not have to draw a salary from the company. Instead they could take a dividend as a shareholder.
- If you are the only shareholder, you will have sole ownership of the company.
- The company pays corporation tax on its net profit after salaries but before dividends.
- Company Law governs a company.
Main disadvantages of trading as a Sole Trader vs Limited Company…
- A sole trader is just an individual in business. Limited Companies may appear more credible and substantial although in reality, this is not necessarily the case.
- Sole traders are personally liable for the business for an unlimited amount. So if anything goes wrong, a sole trader’s personal assets (e.g. house) are at risk. If anything goes wrong in a company, only the company’s funds and assets are at risk. So it offers protection to the shareholders’ personal assets. If a company can’t pay its creditors, the creditors can’t normally come after your personal assets. However, banks etc often require personal guarantees from the shareholders or directors when dealing with small limited companies.
- A Limited Company has better borrowing potential than a sole trader. That’s because it can use current assets as security by creating a floating charge over its assets.
- It’s more difficult to share or hand over a sole trader business with other people. Different people can hold different proportions of shares in a limited company. This means you can easily pass shares onto the next generation. Also, you can pay different amounts of dividends to different shareholders
More disadvantages of trading as a Sole Trader vs Limited Company…
- A sole trader owns all of the business so pays tax on all of the net profit. In a company, you can have different classes of shares with different rights. Such as non-voting shares for someone who only wants to invest some money into the company. Also, if you want to pay each shareholder a different dividend rate. For example, a wife owns 50 A shares and a husband owns 50 B shares. So they own the company 50% each. But they can choose to pay dividends on one type of shares and not the other. So the wife could take all of the dividends. However, there is a trap, so take advice to avoid it.
- Having a limited company can create significant tax advantages. That’s because it pays tax on its profit at just 19%. This is a lot lower than the higher rates of personal tax (40%). However, when you take money from the company you usually pay tax on it. For example, you pay tax at 0% or 8.75% or more when you take dividends from a company.
- If a sole trader leaves profit in the business there is no tax advantage. He/she pays tax all of the profit made. A shareholder can leave profit in a limited company by paying less dividends or salaries which will save the owner tax.
Main advantages of using a Sole Trader vs Limited Company…
- Accounts are optional for a sole trader. Although you may need accounts for mortgages etc. A limited company must prepare and file annual accounts at Companies House. These are available for public inspection as is other information about the company. There are plans to make a small company’s profit and loss account available to the public.
- A sole trader does not have to comply with Company Law. Directors are personally subject to company regulations. Directors receive fines and/or a criminal offence for failing to comply.
- Sole traders can just cease trading and inform HMRC. It’s more complicated to wind up a company.
- You usually pay slightly less accountancy fees as a sole trader. A limited company generally involves higher accountancy fees as there is paper work to deal with.
- Sole traders can offset losses against other income to save tax e.g. employment income. You can’t offset a limited company’s losses against the owner’s other income. But you can offset the losses against future or past profits to save tax.
We can help you
Remember there are factors other than a Sole Trader vs Limited Company tax calculator to consider. This calculator now includes the new dividend tax rates which started in April 2016. Ask us for further advice on whether you should trade as a sole trader vs limited company. We offer a free company incorporation service for all of our clients including new ones. Our accountancy fees are from £50pm for companies.
Sole Trader vs Limited Company Tax calculator
Click >>here for our Sole Trader vs Limited Company Tax Calculator<< Then go to Tax Calculators, Incorporation Calculator, complete the first 3 boxes, or just the first box if you’re a sole trader, then go down and click Calculate.
Would you like to register as a limited company?
Talk to us. We’ll help you consider the other factors not just the result of the sole trader vs limited company tax calculator. We’ll advise you on whether you should trade as a sole trader vs limited company. Ready to choose between a sole trader vs limited company? Contact us about our accountancy services from £20pm. Or go straight to our free new company registration form. We don’t charge to register your new company. But there’s a £12 fee payable to Companies House and you’ll have to start paying us towards your company accounts.
Do you want to remain or be a sole trader?
We can help you too. Our sole trader services start from £20pm including accounts, tax return and reviews. Or if you do your own accounts we can do the tax return for you from £50pa.
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Directors Loan Account in Xero
Xero Accounting are leading the way in the UK with online accounting software. In our opinion Xero is the best and easiest to use online accounting software for small businesses. Recording a Directors Loan Account in Xero Accounting is easy. See our Directors Loan Account page for more details about what it is. If you need specific help with Xero, we are Xero specialist accountants – see our fixed fees.
Setting up the Directors Loan Account in Xero
Xero provide by default a Directors Loan Account (830). However, it will be much easier to avoid using the default Directors Loan Account in Xero account except where it is the only option (e.g. when using Xero Payroll). Instead, we suggest you add a credit card account and call it a Directors Loan Account. By doing this, it becomes much easier to add expenses directly to the Directors Loan Account in Xero, and transfer money to/from it and the company bank accounts. Here is how you set it up:
Click on Accounts, Bank Accounts, then Add Bank Account. Type into the bank search ‘Directors Loan Account’ it won’t find a bank called that so you can then click on Add it Anyway. Type ‘Directors Loan Account’ again in the Name, choose Account Type: Credit Card, then enter any 4 numbers for the credit card number. Finally click Save.
That’s it, you can now use your new Directors Loan Account from the Xero Dashboard to add your expenses (spend money) and record transfers (transfer money) to/from the Directors Loan Account in Xero.
Entering transactions in the Xero Directors Loan Account
It’s very easy to enter transactions to the Directors Loan Account in Xero when it is set up as described above. As with Wave, you need to ask yourself – has the transaction gone through a company account e.g. company bank account or company credit card which is recorded on Xero?
If the transaction has gone through a company account, we are assuming that you have a bank feed set up or you have uploaded bank statements:
- Go to the bank account
- Click on Reconcile
- Find the transaction
- Click on Transfer
- Select the Directors Loan Account
- Edit the reference if it’s not clear
- Click on OK
If the transaction has not gone through a company account, and there is no bill or sales invoice for it in Xero:
- Go to the Directors Loan Account in Xero
- Click on Manage or Manage Account
- Click Receive Money if the amount was received by the director
- Or click Spend Money if the amount was paid by the director
- Enter the details: to, date, description, amount
- Select the appropriate account – usually a Revenue or Expense account
- Click save
If the director paid or received a bill or sales invoice that’s already on Xero: Find the bill or sales invoice; go down to the section ‘make/receive a payment’; enter the details and select the Directors Loan Account; then click on Add Payment.
Checking the balance of the Xero Directors Loan Account
To check the balance of a Shareholder or Directors Loan Account in Xero, there are a few ways:
- Go to the Dashboard or Bank Accounts and see the current balance of the Directors Loan Account
- Go to Reports, All Reports, Balance Sheet, find the account
- Go to Reports, All Reports Trial Balance, find the account
- Go to Reports, Accounting Transactions, select the Directors Loan Account
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Our company car tax calculator, including the associated fuel benefit tax, is below. First, here’s some advice on how company car tax is calculated and how you can reduce it and the fuel benefit tax.
Minimising Company Car Tax
The cost of being provided with a company car has reached extremely high levels and whether to make use of a company car for private purposes now requires careful consideration to minimize the company car tax calculator.
There are a number of factors that can be considered including the following…
- The Basics – the company car tax calculator is based on the vehicle’s list price, CO2 emissions and the type of fuel. The lower the list price and CO2 emissions the lower the tax charge, although diesel vehicles carry a premium. There is no charge for cars which cannot produce CO2 emissions under any circumstances.
- Classic Cars – those cars aged 15 years or more with a market value of £15,000 or more have the market value applied instead of the list price. But for those worth less than £15,000, the list price is used which may be very low.
- Pool Car – if a company car is not normally kept at any individual’s residence and is not just used by one employee, and where any private use is incidental to the business use, the car can qualify as a pool car and not be a taxable benefit at all.
- Cars in a Sole Trader or Partnership – by running a car through an unincorporated business for the business owner there is no benefit in kind. Instead the tax deductible expenses that can be claimed on the car are restricted by the private proportion of use but overall this is far more generous than the charges for a company owned car. Some businesses will split their business into two trading elements with the cars being held in the unincorporated side.
- Cash Contribution – the list price that the car benefit is based on is reduced by any capital contribution made by the employee up to a maximum of £5000. It is possible for the company to loan the employee this amount as well, interest free, without there being a benefit in kind on the interest free loan.
- Company Vans – there is no taxable benefit where employees have to take their company vans home and are not allowed any other private use. Otherwise, the taxable benefit for the private use of a company van is £3,000 (with no reduction for older vans) plus a further £564 of taxable fuel benefit if fuel is provided by the employer for private travel. The difference between a large car and a van can be marginal, but vans are generally those built to carry goods with a design weight of up to 3500Kg . A double cab pick-up is defined as a van if it can carry a payload of at least 1 tonne.
- Private Fuel – a fuel benefit tax charge for private fuel applies even if only a minimal amount of private petrol is used so it is often better to avoid this in the first place or look at repaying the private fuel provided to avoid the charge.
- Home to work travel – be aware that this generally counts as private travel, not business travel.
- Tax Free Mileage Allowance – if you own the car personally and use it for business purposes, you can charge the business for business related journeys and receive the amounts tax free. The tax free limit is presently at 45p per mile for the first 10,000 miles and 25p thereafter and can often prove to be better to do this than to pay company car tax. The company can also reclaim VAT on the fuel element of this payment.
How We Can Help You
We can assist you with tax planning advice in relation to your company car. We have provided a company car tax calculator below, but please contact use for further advice.
Company Car Tax Calculator
To use our company car tax calculator, complete all the boxes including whether there is a fuel benefit, then click calculate at the bottom.
Advantages of a private limited company
The main advantages of a private limited company or a Limited Liability Partnership (LLP) is the protection from unlimited liability in the event you can’t pay your creditors, and the tax advantages of a private limited company.
We’re going to concentrate here on just the main tax advantages of a private limited company:
- Small Private Limited Companies (that’s with profits up to £300,000) pay corporation tax at 20% on all of their profits but individuals (sole traders and partners) pay tax at a range of rates from 0% to an effective top rate of 47% (including national insurance), on different slices of their income. So, it’s possible to pay less in tax by working through a private limited company, but it does depend on the level of your total income and hence the total tax you would pay as an individual.
- If you have £30,000 of profits liable to 40% tax and 2% NI (meaning your total income is about £72,000), the tax & NI saving can be £30,000 x 22% =£6,600 every year on this alone.
- Sole traders and partners pay Class 2 & Class 4 National Insurance on all of their profits, but Private Limited Companies only pay national insurance on salaries and benefits paid to the employees and directors. For someone earning £30,000 in a year, the amount of class 2 and Class 4 NI to be saved is just over £2,000.
- You can get tax advantages of a private limited company at very low profit levels as long as you do not pay all of the net profits out of the company as salary and benefits.
Is there a catch? Possibly:
- There are additional costs involved in running a private limited company such as more administration and higher accountancy fees. Although we only charge from £50pm for companies. Click here to see our fixed accountancy fees.
- With a Private Limited Company you have to consider how much money you want to take out of it and pay to yourself. But this flexibility can be used to your advantage.
- When you take money out it gets taxed on you personally. The two main ways to take money out are either as a dividend or as a salary and we’ll compare them more in another post, but we’re are going to assume dividends are being used as these are normally the most beneficial to small business owners.
- Assuming you can use dividends, you don’t pay any tax on these up to your 40% tax band of £41,450 but you pay 22.5% of the gross dividend above this amount (and 32.5% for those in the 45% rate tax band). If you add this to the 20% your company is paying, it then doesn’t look so great.
- However, if you are happy to only take income out up to the basic rate band threshold (£41,450) and leave the excess profits in the company you can pay far less tax. This means Private Limited Companies can work for people making good profits who want to reinvest the profits of their business above £41,450 into the business, or are possibly happy to leave the profits in their company until a later year when they are making less, and take the money out then.
- Property Developers are one trade where this is often the reason to leave the profits in the company, to buy the next property.
- If you want to get your hands on all the money your Limited Company makes straight away, the advantages of a private limited company aren’t that great.
How we can help you
We can calculate how much you could save by trading as a company. We offer a free incorporation service to our clients to help them benefit from the advantages of a private limited company. Our accounts and tax fees for companies start at just £50pcm. Use the buttons below for more details.
The 2013 Budget announcements included a brief outline of how the law will be changed to tax a shareholders/directors loan taken out of owner-managed companies by the shareholders/directors (herein directors). We have now seen the draft legislation so we can give you further details of how the tax law will apply for a directors loan or repayments made on and after 20 March 2013.
Where a director borrows from his company and repays the loan within nine months of the end of the accounting year in which the loan was taken, there is no tax charge for the company.
However, where the directors loan is outstanding for longer, the company must pay 25% of the loan balance as corporation tax to HMRC. This corporation tax charge is then repaid when the loan is fully repaid.
Four changes may affect when or if this corporation tax is payable:
1. Thirty day rule
Where a directors loan of £5,000 or more is repaid to the company, but within 30 days amounts totalling £5,000 or more are borrowed by the same borrower or one of his associates, the first loan is treated as not having been repaid and is treated as continuing for the purposes of calculating the corporation tax charge.
2. Intention or arrangements in place
Where the directors loan is £15,000 or more, the thirty day rule is ignored if at the time of the repayment of the first loan, the borrower intends to borrow again from the company or has arrangements in place to do so. If those later loans are made they are treated as a continuation of the first loan.
3. Using a third party
Loans channelled from the company through LLPs or partnerships in which the director is a member are treated as if the loan was made directly to the director. This also applies if the loan is advanced to a trust of which a director in the company is a beneficiary, or potential beneficiary.
4. Conferring a benefit
This is intended for the situation where an arrangement, perhaps a partnership structure between the company and a director is used to transfer value from the company to the director. It is unclear how this will work in practice, but any partnerships involving a company and one of more individuals will have to be reviewed.
Personal Tax Return
If you are required to complete a return, they are normally issued to you at the beginning of April each year. The basic return is 10 pages but many sources of income require supplementary pages to be completed as well. Some people receive a short tax return of only 4 pages.
As well as your income it deals with the allowances and reliefs that you can claim.
Paper returns have to be filed by 31 October following the end of the tax year and HMRC will calculate your liability for you. For online returns you have until 31 January following the end of the tax year to file the return. If you file the tax return online through the HMRC website the software will calculate your tax liability for you.
The penalties for late Self Assessment returns are as follows:
- Initial £100 penalty for late filing of the tax return, irrespective of the tax due or if you have paid tax on time.
- If you haven’t filed your return after 3 months daily penalties of £10 per day apply, capped to £900.
- If you haven’t filed your return after 6 months a further penalty of 5% of the tax due or £300: whichever is greater.
- After one year, another 5% or £300 charge, whichever is greater. In serious cases the penalty after 12 months can be up to 100% of the tax due.
The penalties are applicable even if no tax is due.
Corporation Tax Return
The corporation tax self-assessment return (CTSA) must be submitted to HMRC along with the accounts and tax computations, although it is possible to file all this information online through the HMRC website. The filing deadline for the CTSA return (plus accounts and tax computations) is normally 12 months from the end of the accounting period. If the return is late there are penalties as follows…
- Up to 3 months late – £100 (increasing to £500 for a third consecutive late return)
- Over 3 months late – £200 (increased to £1000 for a third consecutive late return)
- 6 to 12 months late – Extra tax geared penalty of 10% of the unpaid tax.
- More than 12 months late – 20% of the unpaid tax.
Q. I formed my new company in November 2012 and I pay wages to my wife because she became a director and employee of that company at that time and does work for the company. My wife is now expecting our first child in August 2013. Can our company pay my wife statutory maternity pay?
A. Unfortunately your wife has not worked for 26 weeks for her employer before the 15 weeks prior to birth, so statutory maternity pay is not due. There is nothing to stop your company from paying your wife her normal wages while she is on maternity leave, but as those wages do not amount to statutory maternity pay the company can’t reclaim that pay from the tax office.