When you’re the director of a business, it’s likely that there will be occasions where you borrow money directly from your company, or inject your own capital into the business.
A Directors’ Loan Account (DLA) keeps track of this money owed between the company and its directors. In many companies, the account is in credit – i.e. the company owes money to the director. This can be due to directors injecting startup capital into the company, not drawing dividends they are owed, or other expenses that have been subsidised by the director.
In these situations, it’s worth considering charging interest on the balance that’s due. But how do you do this? And what impact does charging interest have for the director and company?
Understanding interest on Directors’ Loan Accounts
Let’s take a look at some of the rules around applying interest on DLAs, and the potential benefits this can bring to your company and tax planning.
- Any interest paid re these DLAs will be deductible when calculating your company’s taxable profits. Because of this, it’s possible to achieve tax savings of up to 25%.
- For the individual, a basic-rate taxpayer has a Personal Savings Allowance (PSA) of £1,000 and will pay 20% on the excess. So, paying interest is more tax-effective than declaring dividends. The PSA for a higher-rate taxpayer is £500.
- The interest rate needs to be a commercial rate. In other words, the interest rate used must not exceed the rate you’d expect to see from a third-party lender.
- Where interest is paid to an individual, basic rate tax needs to be deducted at source from any payment made to the director.
- This tax is reportable to HM Revenue & Customs (HMRC) on a calendar-quarterly basis, with the amount deducted offset against tax due on the individual’s personal tax return. Where the company accounts are not drawn up to a calendar-quarter end, a fifth return is required up to the balance sheet date.
- The company can take into account any interest due, but not paid, until up to twelve months later when calculating its own profits. However, the individual will only include as income any interest that’s actually been paid. Note though that ‘paid’ can include crediting to a DLA!. This can give a timing advantage.
Talk to us about maximising the tax benefits of your DLA
Any interest you receive is not subject to National Insurance Contributions (NICs) and is particularly tax effective when shielded by the Personal Savings Allowance (PSA).
The reporting requirements for interest on DLAs are no walk in the park.
Because of this, it’s a good idea to talk to us first, so we can make sure you have a workable system in place prior to making any payments. We can also give an opinion of the acceptability of the proposed rate of interest to pay, and how it measures up against current market rates.
Get in touch to talk about interest on your DLA.