If you’re a company director, you may have heard of the Director’s Loan Account (DLA) – but what does it actually mean and how does it get to be overdrawn?
What is a Director's Loan Account?
The DLA is a record of any money you personally take from or put into your limited company that isn’t salary, dividend, or expense reimbursement. Think of it as a running balance between you and the company.
If you put money in e.g. to cover company expenses, start up costs for instance, the company owes you that money back
If you take money out that is in excess of salary and dividends you then owe the company that money back
It's worth noting that a company can only pay dividends out of profits (after corporation tax) so if the business isn't as profitable as it could be you might not have enough profit to cover your drawings each year, leading to an overdrawn DLA.
Why does this matter?
There are tax consequences to having an overdrawn DLA e.g. it is overdrawn if you still owe the company more than 9 months after the year end. For example, the company will have to pay additional corporation tax on the outstanding balance (known as Section455 tax) and this doesn't get refunded to the company until the loan account is fully repaid.
You will also have a benefit in kind on the amount of the loan outstanding and the company will be liable for additional National Insurance on that beneficial loan.
How to make sure you don't have an overdrawn loan
Keep business and personal spending separate so you only draw a set amount you know the business can afford instead of dipping in and out and ending up with a loan account you weren't aware of.
Regularly review profit levels and the scope for declaring dividends to keep on track and be prepared to cut down on what you draw from the business if profits dip.
Plan ahead as to how you pay yourself to make sure you only draw funds in a tax efficient way.
If you're not sure what your DLA position is, or you don't understand why you have an overdrawn loan make sure to ask us as we'll be happy to explain it for you.
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