Three smart tips to stay on top of your directors’ loan account

Many company directors occasionally borrow from their business to manage cash flow or deal with unexpected personal expenses.

These withdrawals, if not properly recorded and managed, can have tax implications both for the director and the company.

This is where the directors’ loan account (DLA) comes in. Any funds taken out of the company that are not classed as salary, dividends, reimbursed expenses, or capital introduced by the director must be logged in a DLA.

Keeping accurate and up-to-date records helps you stay compliant with tax rules and avoid costly surprises.

Below are three smart strategies to help you manage your DLA effectively.

1. Understand the impact of interest rates on loans

When a company lends money to a director, it can charge interest on the loan. While this rate can be set at the company’s discretion, charging less than HM Revenue & Customs’ (HMRC’s) official rate can trigger a Benefit in Kind (BIK) – resulting in additional personal tax for the director.

To avoid this, it is important to review the HMRC-approved interest rate regularly (as it may change in line with the Bank of England’s base rate) and ensure any loan arrangements are commercially reasonable.

2. Keep DLAs in credit to avoid extra tax charges

If your directors’ loan account is overdrawn at the end of your company’s financial year, and it remains outstanding nine months later, the company may face a Corporation Tax surcharge under Section 455.

This is currently charged at 32.5 per cent on the outstanding balance.

Although the surcharge is refundable once the loan is repaid, there could be a long delay between repayment and reclaiming the tax, potentially affecting your company’s cash flow.

To stay on the safe side, aim to repay any overdrawn balances before the nine-month post-year-end window closes.

3. Use interest wisely to reduce overall tax

If you, as a director, lend money to your company, any interest you charge can be treated as income for you and a deductible expense for the business.

The interest paid must be reported on your Self-Assessment tax return and the company must also deduct and report basic rate tax using a CT61 form each quarter.

While the company does not pay Corporation Tax on the loan itself, the interest paid can help reduce its overall tax liability.

Need support managing your DLA?

Getting to grips with the tax rules surrounding directors’ loans can be complex, but we are here to help.

Get in touch with our team for advice on staying compliant while making the most of your position as a company director.