As the director of a limited company you can use a director’s loan to borrow money from (or lend money to) the business. We explain what a director’s loan is, how it works, and how to account for this in your company’s bookkeeping.
What are director’s loans?
A director’s loan is when you, as a company director, borrow money from your company that needs to be paid back. In other words, it’s a loan from your company that cannot be classified as legitimate expenses, dividends, or salary.
It works in reverse too. A director’s loan could be from yourself to your company, to help see it through cash flow struggles for example, or to invest in research and development.
What is a director’s loan account?
The director’s loan account (DLA) is used to keep track of what you have borrowed from, or lent to, your company. If a director is lending a company more than is being taken out, then the DLA is in credit. If a director borrows more, then the account shows a debit.
Shareholders and long-term creditors don’t look too favourably at DLAs which are consistently overdrawn for long periods of time. Limited companies exist as separate legal entities to their directors, so like any lending facility, avoid over-reliance! Aim to be either at zero or in credit as much as possible.
What sort of “loans” are we talking about?
Director’s loans can take many forms and might not always be a simple case of advancing cash into or out of your business. For example:
- If you’re due a salary according to the payroll, but don’t take it, then the unpaid amount may be credited to the Directors Loan Account (DLA)
- Any dividends which are due may also be credited to the DLA rather than paying them out (as long as you are both a director and a shareholder)
- Putting any outstanding expense claims to the DLA
- You can credit or debit the DLA with money resulting from the sale of company assets to the director (or the other way round), as long as the amount due is outstanding and not paid immediately
- If you take more out of the company than is due for dividends, salary, or expense repayments, then debit the difference to the DLA
- Any unpaid interest related to the loan will also be put to the DLA
Also – and this is really important – if a company funds a director’s private expenditure, it’s possible to record the payment as a loan rather than as a business expense. This then avoids National Insurance charges and income tax that would otherwise be due on a “benefit in kind” if the company bears the expense permanently.
As a director, why might I decide to borrow from my company?
Director’s loans give access to additional money over and above your salary and/or dividends. They’re handy for covering emergencies or unexpected expenses but they do come with risks, and require time and effort to administer.
They should really be used on a one-off basis as an emergency source of personal funds, rather than as a regular income stream.
What about transactions between myself and members of my family, friends or other associates?
If your company is a “close” company (ie. there are five or fewer shareholders), then you must record any transactions between friends, family, or other associates. This also applies if there’s a higher number of shareholders than five, but those individuals are also directors.
How do I show DLA transactions in my company’s accounts?
You must include any advances, loans, or credits made by a company to a director (and any associates) in the notes to the accounts. This should disclose the loan amount, along with the main conditions, interest rate, and any amounts to be repaid or written off.
Conversely, you don’t usually need to disclose loans given to the company by a director, but in the interests of transparency it’s a good idea to do it anyway.
The debtor (where the company is owed money) or creditor (where the director is owed money) will be displayed on the company’s balance sheet.
What is the interest on a director’s loan?
The interest rate charged on a director’s loan is entirely up to the company. Just be aware that HMRC will view it as a benefit in kind if the interest payable is less than the official rate.
This means you’ll need to pay tax on the difference between the official rate and the rate you’ve actually been paying. Class 1 National Insurance contributions will also be due at a rate of 13.8% of the loan’s entire value.
I’m considering a director’s loan. How much can I borrow?
Technically there’s no legal limit as to the amount you can borrow from your company. But! It’s extremely important that you consider very carefully what the company can realistically lend you, and how long it can manage without that money. Avoid creating potential cash flow problems for the future. If you use Pandle, the Cash Flow Forecasting feature and other reporting tools will help.
Considerations and approval
If the director’s loan is more than £10,000 then it’s automatically considered a ‘benefit in kind’, and you’ll need to disclose it on your Self Assessment tax return. You’ll also need approval from each shareholder if the loan is over £10,000.
How soon must I repay a director’s loan?
You must repay your director’s loan within nine months and one day following your company’s year-end. If you don’t, you’re liable for a hefty fine.
Any balance left unpaid after this time will attract a 32.5% Corporation Tax charge (referred to as S455 tax). The good news is that you can claim this tax back once you repay the loan in full. Just be aware that reclaiming can be drawn out process, so really, it’s best to just pay up on time if you can.
I’ve heard it’s possible to take out a director’s loan ‘by accident’. What’s that all about?
This is in fact correct! It is the case that a director’s loan can be taken out ‘by accident’ simply by paying yourself an illegal dividend.
It’s not uncommon for directors to take as much of their income as possible as dividends for the purposes of tax efficiency. But dividends can only be paid out from profits, so if your company hasn’t actually made a profit then you can’t legally take a dividend.
The problem can come if you don’t pay close attention to the preparation and management of your accounts, meaning you inadvertently declare a profit that is actually a loss. You then take a dividend thinking your company is in profit. The dividend is therefore illegal and should then be considered as a director’s loan which is recorded in the DLA in the proper way.
It’s yet another reason why we really, really like accurate bookkeeping, and try to make it as achievable as possible.
I want to lend money to my company. How do I do this?
You might want to lend your own money to your company for any number of reasons, using your director’s loan account to account for the loan.
If you do decide to charge your company interest on the loan, the interest payments you receive are considered income, so you’ll need to include them on your Self Assessment tax return.
As far as the company is concerned, the interest it pays to you is a business expense, and will deduct 20% basic rate income tax at source. The company won’t need to pay Corporation Tax in respect of the loan.
Managing a director’s loan in your company’s accounts with Pandle
Your director’s loan is just like any other important financial business commitment – and you need to keep track of it. Pandle allows you to view and manage your director’s loan account any time, anywhere.
In Pandle your DLA works exactly like a bank account, but it shows how much you still owe your company (or what your company owes you). You can enter any business expenses you’ve incurred too. It’s simple, quick and means you can easily stay on top of things. Learn more about creating a Director’s Loan Account in Pandle
Ready to get started with Pandle and make company finances a breeze? Find out more about our timesaving bookkeeping features, or talk to one of the team using the Live Chat button on screen.