There may be times when you need to borrow money from your own limited company, or you may have unintentionally done so whilst drawing down funds. What are the tax implications of doing so?
In this guide, specialist accountants Intouch Accounting, explain that while you can borrow money from your company, you should be aware of the tax implications of doing so.
Borrowing money from your company – a director’s loan
In practice, many contractors borrow money from their company, some for relatively short periods of time, whilst others will borrow large sums for a long period.
If you are inclined, for whatever reason, to borrow money you should first consider whether you are leaving enough cash in the company for it to pay its liabilities, especially tax bills, on time.
Although rarely done, as a director, you should record the loan taken, and the terms of the loan, in a Director’s Resolution.
Although merely paperwork, it does serve to record the loan when it is made. Under the Companies Act, a loan over £10,000 normally requires the formality of shareholders’ approval.
You may be taxed on the benefit
If overall, the amount you owe is more than £10,000 and is either interest-free or at an interest rate that is lower than an officially published rate (2% for the 2022/23 tax year) then you will incur a taxable benefit in kind.
The value of the benefit in kind is calculated according to HMRC rules and is reported on form P11D after the end of the tax year. The value of the benefit in kind is added to your personal income and taxable at your highest rate of income tax.
What taxes will the company be liable for?
The company also incurs a secondary National Insurance (NI) cost of 13.8% of the value of the benefit in kind.
If the director’s loan remains outstanding for a long period of time then the company may become liable for an additional payment of Corporation Tax.
If you are a director and/or a shareholder you are called a Participator.
If any loan at year-end to a Participator, or an associate of a Participator, remains outstanding 9 months and 1 day after the end of the company’s accounting period will mean that the company must pay an amount of Corporation Tax equal to 32.5% of the amount still outstanding.
The payment of Corporation Tax can be recovered when you repay the loan back to the company.
The repayment is not made by HMRC until 9 months and 1 day after the end of the accounting period in which the loan is repaid to the company. If you repay part of the loan, a proportionate part of the Corporation Tax paid is repaid.
What happens if your company ‘writes off’ a loan?
New rules introduced in 2013 affect how loans are treated if they are repaid and ‘replaced’ with new loans.
If the loan is written off and never repaid to the company then the amount of the loan will be treated according to your relationship with the company.
If you are a shareholder and a director (the normal situation for limited company contractors) the written-off amount is treated as a distribution and no tax relief is gained by the company.
However, although the written-off amount is treated as a distribution for income tax that is not the case for NI. The NI cost would be a deduction from profits for the company.
If you are only a director then the written-off amount is treated as the net of tax pay and grossed up to calculate PAYE and NI. The company would then be entitled to deduct the gross amount and employer’s NI from its profits and receive tax relief.
We recommend that you speak to your accountant before writing off any loans to decide the best way forward.
Further points to note
Loans made to friends and family may differ from the above. Loans made to your spouse are often taxed as though they were made to you but if the loan is made to a friend or a remote member of the family then in some limited circumstances the loan may not be taxed in the way described above.
There are also other limited exemptions where the loan is taken for specific qualifying purposes.
You should discuss the purpose of any loan with your accountant to explore any opportunities that may limit either the benefit in kind or Corporation Tax charges.
Read HMRC’s official guide to director’s loans for further information.
Thanks to Intouch Accounting for providing these answers. Intouch is a specialist contractor accounting firm, a member of the FCSA (Freelancer and Contractor Services Association) and a member of the ICAEW Practice Assurance scheme.