What is an overdrawn Directors Loan Account (DLA)?
Author: Cerith Williams, Senior Client Manager
A Directors Loan Account or DLA records the transactions that happen between a company and its director. This can be dividends, expenses paid by a company on behalf of the company or company expenses paid by the director. There may be tax implications if the company is a close company. A close company is a company with broadly up to 5 directors/shareholders or unlimited if they are related parties i.e., relatives. The account is overdrawn when the company is owed money by a director.
If the DLA is overdrawn this can be cleared in different ways.
One way is an increase in salary. This can be a bonus paid to the director and is allowable against corporation tax. Or, by declaring a dividend (this will mean the money is owed to the business owner reducing the DLA). This is the preferable route as dividends are outside the scope of national insurance contributions or NIC (with the potential increase of the corporation tax rate dividends as they are declared after tax). If there are negative company reserves, a dividend is not allowed and deemed illegal.
Benefit in kind
When a DLA is overdrawn by over £10,000 at any point during the year there is a ‘benefit in kind’ charge that is reportable on a P11D. This will result in class 1A NIC for the company.
There are a couple of exceptions when a taxable benefit does not apply:
- The loan is used for a certain qualifying purpose like buying interest in a partnership.
- The company charges a market rate of interest on the loan.
Under normal conditions it is more beneficial for the company to pay Class 1A NICs on the benefit than for the director to pay the interest.
For DLAs that are still unpaid after 9 months and 1 day past the company’s year-end, HMRC will charge the company at a higher dividend rate (currently 32.5%) on the outstanding balance. This is known as Section 455 tax.
The payment made is refundable once the loan has been repaid. The repayment is not automatic. This will need to be claimed by entering the information onto the CT600 (corporation tax company return) and on a L2P form.
If the loan is paid off before 9 months and 1 day of the year-end, a disclosure will need to be made on the CT600, but no tax will be payable.
Keep your accounting software up to date so the DLA balance is as accurate as possible to avoid going overdrawn. Software like Xero will let you keep your DLA balance on the home screen so you can keep an eye on it.
For help with DLAs or any other aspect of your business finances, please don’t hesitate to contact team LHP. We’ve over 85 years’ experience in helping businesses thrive, adapt and grow and our team is here to help. Let’s Talk.