So, what exactly is a Directors’ Loan Account (or DLA for short)?
If you want to get all technical about it, it’s a creditor account that forms part of the balance sheet within the accounts. In my easy speaking world, it’s a special little pot that houses all transactions between a director and the company.
The company needs some funds to help it through a sticky period. The director decides to lend the money to the company (say £5k). This £5k gets ‘posted’ to the DLA and sits on the balance sheet as a loan i.e. the company owes you that £5k back, payable at some point in the future. You might then pay for some expenses on behalf of the company; stationary, a utility bill, or some client entertaining perhaps. Again, you’re technically loaning the company more money so we add these onto the DLA balance.
Another example might be your monthly salary or a dividend payment if you’re a director/shareholder. You might like to declare a salary or dividend through the books but not actually pay the physical funds out because the company can’t afford it right now or quite frankly, you don’t need it. Once more, the amount would be posted to your Directors’ Account.
What happens next?
You’ve lent the company the £5000, you’ve paid for some expenses on its behalf, you’ve declared a few salary payments but not withdrawn anything and all of a sudden there’s a nice little balance sitting within that pot of yours that’s quite rightly owed back to you. When can you take it and what are the tax implications? The answers are a) whenever you like and b) none! Any balance owed to you via your Directors’ Account will come back to you tax free and can be paid pretty much whenever the business can afford it. You can take it in dribs & drabs or all in one go, so long as it’s correctly recorded within the books, it’s all above board.
On the flip side, you may get to the point where you take money out of your DLA over and above the money you’ve put in. This would result in your account being overdrawn and, whilst being legal, is probably a different lesson for a different day.