What is a Director's Loan?
Posted on 3rd February 2025 at 11:01
What is a Director’s Loan?
A director’s loan allows the director of a limited company to access money from their company for personal use, without deducting it from your income, dividends or expenses. As a director, you can either borrow money from the business or lend money to the business, but either option requires a record of all the transactions made. This is known as a Director’s loan account (DLA) and if the company has more than one director, each director must have their own DLA.
HMRC defines a director’s loan as money taken from your company that isn’t either:
• A salary, dividend or expense repayment OR
• Money you’ve previously paid into or loaned the company.
At the end of the financial year, depending on the position of your DLA, you’ll either owe the company money or the company will owe you money. This will be recorded as an asset or a liability in the balance sheet of your company’s annual accounts.
A Director’s Loan may appear to be a better alternative than a bank loan, however, it should be carefully considered, as it can lead to heavy taxation for both the director and the company if the terms of the loan do not comply with HMRC’s rules.
How much can I barrow?
There is no limit to what you can borrow, however careful consideration should be given to how much the company can reasonably afford to lend you.
A director is solely liable for any funds taken from the company, and it is their responsibility to return them. For example, if the company goes bankrupt and there is an overdrawn director’s loan account, the director must repay it because it is an asset of the company.
How do I get a Director’s Loan?
There are no restrictions on how you can use a Director’s Loan, but it should be used as a last resort for short-term debt.
To obtain a director’s loan, you must first get approval of the shareholders, especially if the loan exceeds £10,000. Any loan which exceeds this amount will be classed as a benefit in kind and you may have to pay tax on the loan at the official rate of interest.
The tax implications of a director's loan account can be complex and are dependent on the financial position of you as the director and your company. If you have a director’s loan account and are concerned that your company is in financial trouble or is on the verge of insolvency, we can help.
For further information click the below link:
https://www.thegazette.co.uk/insolvency/content/103819
Tagged as: #smithandbarnes #directorsloan
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