Directors Loan Accounts – Tax opportunities and implications

A director may want to withdraw money from the company for various personal reasons, it is crucial to do this in the most tax-efficient manner.

Why would a director want to take money out of the company?There are the usual monthly needs that directors and shareholders will want to be drawing out of the company for their living expenses.  There are also many other reasons why a director may want to take money out of the company on top of their usual income.  This may include buying personal property, house renovations, family needs such as school fees, driving lessons, or planning for retirement, for example. It is important to ensure this is considered and done in the most tax-efficient way for the company and the director. 

What is a Directors Loan Account (DLA)?The director's loan account (DLA) only applies to a limited company and is a record of the transactions between the company and its directors. It details either, the money borrowed by directors from the company (overdrawn directors loan account), or the money lent by the directors to the company.

If a director has a balance available on their director’s loan account, they can draw down on this with no tax implications or reporting requirements. It’s effectively like they’ve got a bank account they can just dip into. However, if more funds are drawn down than available, and the director's loan account goes overdrawn this will potentially create tax issues.

What are the tax implications of an overdrawn Directors Loan Account?It is important to avoid making a director’s loan account overdrawn as there are tax implications. 

• Benefit in kind will apply to the director unless interest is charged to the director.  If there is interest charged to the director and the interest rate is below the official rate set by HMRC, then benefit in kind will apply, and the director will need to pay income tax on the benefit in kind. 
• The company will have to pay class 1A national insurance on the benefit in kind (BIK)
• If the loan is not repaid 9 months after the year-end, then section 455 tax (currently 33.75% for 2024/25) will apply to the company as well. 

We sometimes get asked whether the surplus cash within the company can be taken out as a loan to a director (i.e. the director borrows money from the company).  This has the same effect and tax implications as making the director’s loan account overdrawn.

What are the tax opportunities for a Director's loan account?

• Consider charging interest on positive Directors Loan accounts

If a Directors Loan account is positive (otherwise referred to as being ‘in credit’) then it may be beneficial to consider charging interest to the company.  This would need to be a market rate of interest, and this interest charge is a deductible expense against corporation tax in the company.  Depending on the director’s personal income and tax situation, some of this interest received could also be tax-free for the director.

• Ensure business mileage is claimed

Where appropriate and directors are using a private car for business trips, or where fuel for a business car is being paid for privately, directors can reclaim business mileage costs from the company.  It is important to ensure the correct rates are charged – more details here

• Review whether there are any routes other than Directors Loan accounts for cash to be extracted 

The key to tax efficiency is to assess whether all costs and family needs that are currently showing as drawings or allocated to director's loan accounts are necessary. For example, are there better ways of getting this money out without hitting DLAs? Find out more here.

• Produce forecast for your Director's Loan Account

It is beneficial to do a forecast of the director’s loan account for the next few years, this enables directors and their tax advisers to assess the timing of dividends and remuneration planning, to avoid or mitigate an overdrawn DLA. As we mentioned above, an overdrawn DLA could incur significant tax bills and benefit in kind costs for the company.  Directors also need to consider the personal tax implications, and we would recommend seeking professional advice.

Recommended actions:

1. Consider whether the Directors Loan account is being optimised.  For example, charging interest, and reclaiming business mileage, etc.
2. Produce a forecast for each Director's loan account, taking into account personal needs and desires for extracting cash, and assess the best way of tax efficiently managing this
3. Look at other routes of extracting cash tax efficiently, other than putting pressure on Director's Loan accounts (DLAs) 

There are alternative and more effective ways of extracting cash from the company for a director, and over the years we have developed 10 ways for directors to extract money from the company tax efficiently. As a director wanting to extract cash from the business, you want to minimise the tax costs as much as possible for you and the company. 

If you want to find out more, or for us to go through the various methods we have recommended and used with our clients, feel free to get in touch via email or phone or click here to book a free zoom call with a tax advisor to go over how to structure your income to make the most of the lowest rates of tax, strategies to extract money out of your company, and creative ideas for using valuable assets to release cash. 

Please note: This article is provided for information only and was correct as at time of writing (14/08/24). Any lists and details provided above are not exhaustive and are not intended to be full and complete guidance.  No action should be taken without consulting detailed legislation or seeking independent professional advice. Therefore, no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this article can be accepted.