Chris Thorpe looks at the potential issues in using a directors’ loan account.
One of the features of being a shareholder in a limited company, as opposed to being a sole trader or partner, is that you cannot just help yourself to company funds whenever you like. It’s no longer your money; it belongs to the company.
Those funds need to be declared as dividends or salary, but another way to extract funds from the company is simply to borrow money via a directors’ loan account (DLA).
If the borrower is also an employee or director and they pay a market rate of interest for their loan, there are no income tax implications. If the rate is below this, and the amount borrowed is more than £10,000, a benefit-in-kind income tax charge will arise (and a Class 1A National Insurance contributions (NICs) charge on the company).