When might you want to take out a director’s loan? Neil Dingley of Moore Recovery in Stoke on Trent explains what a director’s loan account is and how it works.

What is a director’s loan account?

A director’s loan account (DLA) is a record of transactions where at any point in time an amount of money, which isn’t a salary, dividend or expense repayment, is either:

• owed by the company to a director
• owed by a director to the company (called an ‘overdrawn loan account’)

Various provisions of a DLA are set out in the Companies Act 2006 and the accounting and taxation treatment of a DLA is determined by HM Revenue and Customs (HMRC).

Who can take out a director’s loan?

As the name implies, a director’s loan is principally a transaction or series of transactions between a director and the company.

However, if the company is a ‘close company’ (a company which is controlled by five or fewer participators (any person who has a share or interest in the capital or income of the company) or a company which is controlled by any number of participators if they are also directors of the company) and ‘private’ payments are made by the company to the director’s family, friends, business partners or any other person associated with the director, then these transactions should also be recorded in the DLA.

When might you want to take out a director’s loan?

There many reasons why a director may wish to take out a loan from the company, however such loans tend to fall into one of two main categories:

1. You may wish to borrow money from the company in order to help you with a temporary cash flow problem with your own personal finances outside of the company’s affairs.
2. It’s often custom practice in owner managed businesses for the director to be paid partly through the payroll, usually up to the National Insurance threshold, and partly by way of dividends, declared and paid out of the company’s distributable reserves. In order to assist with your own monthly cashflow requirements you may draw a certain amount from the company each month. This amount will accumulate month on month until such time as a dividend is declared when the amount which you have in effect borrowed from the company is set off against the declared dividend. In practical terms the payments on account of your anticipated dividend comprise a loan from the company until such time as the dividend is declared.

How much can you borrow on a director’s loan?

There are no specific limits as to how much a director can borrow from a company, however there are certain implications a director should be aware of if they have an overdrawn loan account.

The introduction of the Companies Act 2006 removed the general prohibition of companies making loans to directors. As a rule, loans for more than £10,000 require shareholder approval beforehand. In many small companies, however, as the director and the shareholder are one and the same person the approval is more of a formality than a specific legal issue.

However, if the loan is more than £10,000, your company must treat the loan as a benefit in kind and you may have to pay tax on the loan at the official rate of interest.

What is the interest on a director’s loan?

The official rate of interest is currently 2.5% per annum but the company and the director can set their own interest rate or even determine that no interest should apply to the loan. However, as mentioned, if the amount outstanding is more than £10,000 and interest has now been applied at the official rate this could give rise to a benefit in kind for the director.

How soon do you need to repay a director’s loan?

The terms of the loan are agreed between the director and the company. However, if the DLA remains overdrawn nine months after the company’s accounting period, section 455 of the Corporation Tax Act 2010 (formerly section 419 of the Income and Corporation Taxes Act 1988) provides for a tax charge in the hands of the company on the lower of the amount outstanding at the year end and the balance nine months after the year end.

As mentioned above, any overdrawn DLA greater than £10,000 will give rise to a benefit in kind for the director.

Can you lend money to your company?

Provided the company’s articles of association do not say otherwise, as a director you can lend money to your company. However, please beware that in the event of insolvency, unless the loan you make is secured by a charge over the company’s assets, your loan will be treated the same as any other unsecured creditor if a distribution is made.

Should you take out a director’s loan?

Loan accounts between directors and their companies are common, as transactions between director and company are recorded in the ordinary course of business. But there are two things directors should bear in mind when it comes to DLAs:

• a benefit in kind could arise with an overdrawn loan account
• there may be consequences if the company goes insolvent – any amount owed by the director to the company will be treated as a debtor by the liquidator or administrator and will need to be repaid

About the author

Neil Dingley is an Insolvency Practitioner and Partner of Moore Recovery in Stoke on Trent and has a background in information technology and accountancy.

See also

What are the responsibilities and duties of a company director?

Insolvency notices

Find out more

Director's loans (GOV.UK)

Companies Act 2006 (Legislation)

Expenses and benefits: loans provided to employees (GOV.UK)

Corporation Tax Act 2010 (Legislation)

Income and Corporation Taxes Act 1988 (Legislation)

Image: Getty Images

Publication date: 30 September 2020

Any opinion expressed in this article is that of the author and the author alone, and does not necessarily represent that of The Gazette.