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What is a Director’s Loan?

Posted 25/06/2018 by Amy Patterson

A Director’s Loan Account (DLA) is a record of transactions between a Director and the company. For example, if a Director pays for anything for personal use through the company (i.e. weekly food shop), this money is owed back to the company. If a Director pays for something for the company (i.e. office supplies) from a personal account, this is money that is owed back to the Director.

We realise that not many people can afford to wait until the end of the financial year to take money out of the company. That just isn’t how life works! In real-life, Director’s will often take monthly amounts to live off.

The treatment of these sums during the course of the year needs to be decided:

  1. Monthly salary declared via payroll – deductible from profits and thus generating a reduction in the Corporation Tax charge.
  2. Dividend payments declared on account of expected post tax profits.

Option 2 requires careful planning – the total dividends paid must not exceed final profits for the year, unless there is an accumulated surplus from preceding years.

All those holding the same type of share are entitled to the same level of dividend.

If, at the end of the year, the Director is in a position where they have taken more money out of the company than they have put in, they must pay the money back. This is called an overdrawn Directors Loan Account.

When at the year end the company calculates how much profit (hopefully!) it has available to distribute between the shareholders, the amount already declared as dividends is deducted, leaving the balance that can be declared as additional dividends after the year end. These can be allocated to clear the balance that a Director owes the company. Here is an example of how this works.

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