One of the most common areas of confusion we see with business owners is the difference between dividends and a Directors’ Loan Account (DLA). While both can involve money moving between the company and its directors, they are not the same thing and mixing them up can lead to unexpected tax bills and HMRC scrutiny.
What is a Dividend?
A dividend is a distribution of profit from the company to its shareholders. Before distributing a dividend, the company must:
- Have enough post-tax profit available.
- Hold a proper board meeting and keep minutes.
- Issue dividend vouchers to document the distribution.
Dividends are not a business expense. They are a distribution of profit and will be taxed on the individual shareholder through their Self-Assessment return.
What is a Directors’ Loan Account (DLA)?
A Directors’ Loan Account records all the money transactions between a director and the company that are not salary, dividends, or reimbursed expenses. This could include:
- Money you lend to the company.
- Money you withdraw from the company that isn’t salary or dividend.
- Personal expenses accidentally paid through the business.
If the DLA is overdrawn (i.e. the director owes the company money), there can be tax consequences for both the company and the director, including a special corporation tax charge (Section 455 tax).
The “Taking Cash” Trap
This is where many directors slip up. Simply taking cash out of the company bank account does not automatically make it a dividend. Unless it’s been properly declared, documented, and backed by available profit, it will be treated as part of your Directors’ Loan Account instead.
In other words:
- No paperwork, no dividend.
- Unrecorded withdrawals often end up as loans, with potential tax charges.
- HMRC expects dividends to be clearly declared and evidenced not just “cash taken when needed.”
Why Do Clients Get It Wrong?
The confusion usually comes from treating any withdrawal of cash as a “dividend” even if the company doesn’t have the profits to back it up or the paperwork to support it. Other times, directors assume the DLA is “their money” and forget that an overdrawn account is effectively an interest-free loan from the company, which HMRC keep a close eye on.
The Risks of Mixing Them Up
- Unexpected tax charges for both the director and the company.
- Increased HMRC scrutiny, especially if accounts show repeated overdrawn DLAs.
- Cash flow problems, if the company pays out more than it can afford.
Our Advice
Always make sure dividends are properly declared and documented and keep your Directors’ Loan Account under control. If you’re unsure whether a payment is a dividend, a loan, or something else, ask us first, it could save you a costly mistake later.
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