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  • Writer's pictureJason Short

Directors Loan Accounts within Limited Companies

Updated: Feb 22

Directors Loan accounts explained: When you dip into the company bank account to buy an item personally, it is recorded in the Company Accounts within the Directors Loan Account.


The loan has to be paid back to the company to settle the account, whether it be through a dividend, Pay, or making a cash payment into the company account.


HMRC imposes taxation on Directors Loan accounts of 32.5% to avoid company Directors taking endless loans. This tax does not need to be paid for 9 months and 1 day from the company's year-end, and if the DLA is cleared within this period, the tax never needs to be paid at all.


If the loan isn't paid back and the tax becomes due, but if the Director's loan is cleared within the next 4 years, the tax can be claimed back. Claims are completed using HMRC's CT600A or L2P (Loan to Participators) form. An important point to note is that the rebate should be claimed 9 months and 1 day after the end of the accounting period when the loan is repaid. For example, if a company used a regular calendar year for its accounts production, it would have a Director's loan created in year one. Tax is paid on this loan at the end of year 2. If the loan is then repaid at the end of year 2, the claim for the tax can be made from the 1st of October in Y3. This is 9 months and 1 day after the 31st of December in year 2, the year-end when repayment was made.


Y1 - Creation of DLA

Y2 - Tax Paid at 32.5%, and then DLA Cleared at the end of Y2

Y3 - 1st of October - 9m and 1 Day after year-end the claim can be made


If the loan is over £10,000, the rules become a little more complex. The Loan must be included as a benefit in kind on the Directors P11D and employers' NI calculated and paid. To avoid this, the Director can agree to pay the company an interest rate equal to the HMRC loan percentage of 2.25% (2020-21) or higher.


Working out the Benefit of Loans for Directors P11D.

The 'exact method' of working out benefit in kind is to allocate the number of days the loan account was overdrawn and multiply it by the HMRC rate of interest. For Example:

£12,000 x 62/365 x 2.25% = £45.86 BIK earnings for the Director

£45.86 x 13.8% NI = £6.33 Class 1A NI (paid by the company)

There is no NI to pay for the Director.


Bed and Breakfasting!

To stop company Directors paying the loan back at the end of one accounting period and instantly taking another the loan at the beginning of another, HMRC has introduced a 30-day rule known as Bed and Breakfasting. The loan needs to be paid back for a full 30 days to register as being paid in HMRC's' eyes.


If loans are over £10,000, shareholder approval is needed. This can be raised if the loan is for company expenditure, in which case the shareholders need to approve it when over £50,000.


If you have any further questions, please get in touch!

Jason Short





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