The tax rules associated with borrowing money from your own limited company are fairly complicated. Therefore, it is important for company directors to understand the rules, guidelines, and tax implications associated with taking out a Director’s Loan.
In this blog, Kerry Newman, Head of SG Accounting looks at what a Director’s Loan actually is, what Limited Company contractors need to know, and potential problems you need to be aware of.
What is a Director’s Loan?
A Director’s Loan is money taken from the company which doesn’t fall into the categories of salary, dividends, or an expense repayment. Any such withdrawals must be recorded in the director’s personal Director’s Loan Account (DLA).
Who can take a Director’s Loan?
Only directors of the Limited Company can take a Director’s Loan. In small Limited Companies, the shareholder and director may be the same person.
Why take a Director’s Loan?
Directors may need to take a loan for personal expenses or unexpected financial needs. However, these loans must be recorded in the Director’s Loan Account.
What is a Director’s Loan Account?
This is a record of transactions (excluding salary and dividends) between the company and its directors. It includes cash withdrawals and personal expenses paid using company money or credit cards.
How to take a Director’s Loan
Approval from the company shareholders is usually required, especially if the loan exceeds £10,000. Written approval must be kept as a record.
When do you repay a Director’s Loan?
HMRC rules state that Director’s Loans must be repaid within nine months of the company’s year-end, in order to avoid any additional tax. Your contractor accountant will be able to advise you on your company’s year end and when this date would be.
What are the associated tax implications?
Whether a Director’s Loan is taxable will depend on when it is repaid. If repaid within nine months and one day of the company’s year-end, then no tax is owed. Otherwise, additional Corporation Tax (Section 455 CTA Tax) may apply. Again your accountant will be able to advise you on this based on your personal circumstances.
How to repay the loan
Repaying the loan can be done using a dividend payment or salary to return the money to the company’s bank account.
What happens if you can’t repay the loan?
If you’re unable to repay the loan you may find yourself facing legal consequences, which can include potential bankruptcy should it put your company into financial difficulty.
‘Bed and breakfasting’
Is a term given to when you repay the loan before the year-end, and taking another loan out straight after. HMRC has a rule in place to prevent this, including a 30 day rule should the loan value exceed £10,000. Your accountant will be able to advise you further on this.
Is a Director’s Loan a Benefit in Kind?
If your loan exceeds £10,000 without interest, or with interest below HMRC’s average beneficial loan rate, then it may be considered a Benefit in Kind and will therefore be subject to tax.
HMRC actively monitors Director’s Loans, especially if the accounts are regularly overdrawn. There’s a chance these loans may be viewed by HMRC as a salary rather than a loan, and they could impose Income Tax and National Insurance.
Consider professional advice
Tax can be really confusing, especially if you’re not up to date with the latest legislation, therefore it’s always good to seek advice from an experienced accountant before considering a Director’s Loan.
In summary, while Director’s Loans can be a useful financial tool, they come with legal and tax responsibilities that must be carefully managed to avoid potential penalties and complications. Directors should stay informed and consult with professionals as needed to navigate these complexities, and to ensure they’re staying on the right side of the taxman.
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