If you are relatively new to the world of business, you may have been trading for a year or so and are still getting used to the ins and outs of corporate accounting. You may have taken advice and set up your business as a limited company from day one and understand that it is a separate legal entity for tax purposes. However, you are not 100% certain how to treat any personal expenditure that you incur, if linked to the business, or how to handle any money that you may have advanced, to pay for business expenses. In short, you need to learn a little more about the director's loan account.
Understanding the DLA
This is certainly an area where you should get professional advice, as the way you treat this type of process can have tax implications. Broadly speaking, however, the director's loan account is not an account per se but is a means of tracking money that you may owe to the limited company, or it may owe you.
For example, you may have injected a certain amount of money into the business to pay for some machinery or to otherwise expand your operation. This should be accounted for in the DLA. Likewise, you may have accounted for a salary as an employee of your company, but have never taken the money and here, that cash will sit in the DLA.
On the other hand, you may have taken advantage of some lower life insurance payments that are linked to your role as a business director, and in this case, you can effectively take money out of the director's loan account to pay for these costs.
Other Indications
If you have a positive balance in your DLA at the end of the year, you are allowed to withdraw money from it without having to pay any tax. Essentially, your company is repaying the loan that it received from you and this is not treated as additional income.
Sometimes, there may be a negative balance if you owe the limited company money and you need to treat this very carefully from a tax perspective. If it's not possible to pay this back in total, can you give yourself an additional dividend as a shareholder? In other words, that element will come out of the profit.
You may have to pay additional corporation tax on a director's loan account if it exceeds a certain amount of money and if you cannot pay the total amount back within a set time period.
Where Do You Stand?
If you're not sure if you owe your company money or vice versa, get in touch with an accountant so they can figure out the status of your director's loan account. For more information, contact your local accounting services today.
