Director Loan account is used for the money withdrawn from company account which is not salary, dividends or expenses repayment.
Why do I need to use loan account ?
In HMRC eyes, Company is separate legal entity. Your assets and cash are counted separate to company assets and cash.
Any withdrawal you make from company accounts except from the above list need to be recorded in Director Loan Account (DLA).
Similarly, when you lend money to company, it also need to be recorded as lent to the company.
If company have more than one director, each director need to have their separate DLA account. All the withdrawn except salary, dividends or expenses reimbursement need to recorded in DLA.
What are the implication if DLA account is in debit/you owe money to company ?
Until there is no money owed to company there is no tax implication. However, if the DLA account is in debit means you owe the money to company at year end date, you may have to pay tax.
If you pay back the entire money with in nine months and one day from the company year end date, you would not have to pay any tax.
What sort of tax need to paid on overdrawn DLA account ?
Your company need to pay 32.5% corporation tax (CT) on any overdrawn DLA account.
This CT is repayable to company by HMRC once the DLA is cleared means paid off.
It also notable, if you used bed and breakfast scheme, it is not acceptable. Bed and breakfast scheme means when you take out loan and repay it after the year end and take out loan again for same amount within a month.
If the DLA account is written off, there may be 32.5% personal tax to be paid which is not refundable.
What is the interest on DLA ?
It is depend on individual company what interest do the charge to directors. If the interest rate is below official rate then it will be treated as 'benefit in Kind'. It need to be reported on P11D and class 1A national insurance (NI) will be payable. Employer National insurance rate is 13.8%
Official rate is changed on yearly basis. For year ended 5th April 2021, it is 2.25%
It is also notable if the loan amount is less than £10,000 then their is no requirement to complete P11D.
How much can I borrow in DLA ?
There is no limit set up by HMRC on loan amount. However, you should take reasonable care that company can afford to lend you the money.