Directors Loan Account

Most Directors of small companies have two key controls / restraints around money that they borrow from a Company (even if it’s their own Company) through their Directors loan account.

This article has been updated at Apr 2017 for current rates

  • If they borrow more than £10k at any point from their company they must be charged interest of at least 2.5% (HMRC current beneficial loan rate at 6th April 2017) otherwise they will incur a benefit in kind tax charge on their Directors loan account balance. It is usually more tax efficient to pay the interest rather than incur the tax charge.
  • To calculate the interest you can use either a daily rate calculation or if your balance does not move much during the year you can use an averaging method using the average of the opening and closing loan balance.
  • If any money they have borrowed from the company is not repaid in full within 9 months of the end of the accounting period then a temporary corporation tax of 25% of the outstanding loan value has to be paid to HMRC. This can only be reclaimed from HMRC 9 months after the end of the accounting period in which it is repaid. This is referred to a s455 tax. UPDATE: from 6th April 2016 the s455 rate increases from 25% to 32.5% and from 6th April 2022 it has increased to 33.75%)

Directors Loan Account

The Directors must have permission from the shareholders and Directors to borrow the money in the first place. If this is your own company this is not an issue but where there are other Directors and shareholders some minutes should be drawn up approving the Directors loan and the details around repayment and interest.

All borrowings and repayments will be recorded in your Directors Loan Account (also known by it’s abbreviated term, ‘DLA’) on your books (by that we mean your accounting / book-keeping system).

Other than lump sum borrowings, other items which might be logged in your Directors Loan Account could be:

  • personal expenses which have gone out of the businesses bank account
  • business expenses which you have incurred personally
  • any loans that you have given to your company