As a limited company director, withdrawing money from your business might seem straightforward. However, if not managed properly, it can lead to unexpected tax liabilities, penalties, and even HMRC scrutiny. Understanding how a Director’s Loan Account (DLA) works is crucial to staying compliant and avoiding costly mistakes.

What is a Director’s Loan Account (DLA)?

A DLA records any money you take from your company that is not salary, dividends, or reimbursed expenses. If the amount withdrawn exceeds what you have put back in, it results in an overdrawn loan – which comes with tax implications.

Tax Implications of an Overdrawn DLA

 

1. The 9-Month Rule – Avoid a Hefty Corporation Tax Charge

If a director’s loan is not repaid within nine months after the company’s financial year-end, your company must pay a 33.75% Corporation Tax charge on the outstanding balance. Example:  

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  • – You borrow £20,000 from the company.

 

• • – If unpaid after 9 months, the company faces a £6,750 tax charge.

 

• • – The tax is reclaimable but only once the loan is fully repaid.

 

2. Loans Over £10,000 – The Benefit-in-Kind Trap

If you borrow over £10,000 without paying interest, HMRC considers this a benefit-in-kind, meaning:
 

• • – You must pay income tax on the loan benefit.

 

• • – Your company must pay 13.8% National Insurance (NI) on the benefit amount.

 

3. Charging Interest – A Tax-Efficient Solution

A smarter alternative is for your company to charge interest on the loan at HMRC’s official rate (e.g., 2.25%).

Benefits:
 

• • – No benefit-in-kind tax for you.

 

• • – The company can declare the interest received as taxable income, reducing tax inefficiencies.

 

Common Mistakes Directors Make

 

• • – Forgetting to repay the loan within 9 months, leading to an unnecessary Corporation Tax charge.

 

• • – Taking repeated large loans, attracting HMRC scrutiny and potential compliance checks.

 

• • – Failing to properly record DLA transactions, which can lead to accounting errors and tax penalties.

 

Best Practices for Managing Your DLA

 

• • – Plan ahead – Repay loans within 9 months to avoid additional tax charges.

 

• • – Charge interest at HMRC’s official rate to prevent benefit-in-kind tax.

 

• • – Maintain accurate records to ensure compliance and avoid discrepancies.

 

• • – Consult an accountant before taking a director’s loan to explore tax-efficient alternatives.

 

Final Thoughts

A Director’s Loan Account can be a useful tool when managed correctly. However, failing to understand the tax consequences can lead to unnecessary costs. By following best practices and seeking professional advice, you can ensure financial efficiency while staying compliant with HMRC regulations.