What are director’s loans?
If you are a director, you can lend money to and borrow money from your limited company. In this article, we will explain how you can do this and the taxes you and your company may need to pay if you do so.
What are directors’ loans?
A “director’s loan" is the term used when the director of a company either puts money into or takes money out of their business and the money is transferred on the understanding that it will be paid back.
If you want to put money into your business for expansion or working capital, it is far less complicated to do so as a loan than a share investment. When you take the money back either in full or in parts, there is no tax you will have to make on repayments.
If you want to take money from the company but not as a salary payment or a dividend, you can do so as a loan. There are rules you have to follow when taking a loan from your company and we’ll cover those in a few minutes.
Do I have to pay tax? Money the company owes me
Your company will not pay any corporation tax on money that you lend to it. If you decide to charge interest on your loan then that interest will count as both a business expense for your company and personal income for you.
Any interest income you receive personally must be reported on your self-assessment tax return at the end of the year.
Do I have to pay tax? Money I owe the company
You need to declare any loans to directors and shareholders at your company’s year-end in the accounts and on your company tax return.
As you know, you need to submit your accounts and make payment of corporation tax within 9 months and 1 day of your financial year end. If you repay the loan in full within that 9 months and 1 day, no tax is payable by either you or the company.
If you don’t repay the loan within 9 months before the end of your corporation tax accounting period, you will have to pay corporation tax at 32.5%, regardless of the size of the loan (25% if the loan was made before 6th April 2016). You can reclaim this back once the loan has been repaid in full but the process is quite complicated. You will also be waiting a while to get the money back.
It is possible to write the loan off by paying a dividend to the amount of the loan (if you have the available accumulated profits in the company). However, depending on HMRC’s interpretation, they may choose to argue that the original loan was in fact a salary payment and charge you for Class 1 National Insurance on the amount. If they do this, you will also have to pay income tax on the loan through your Self Assessment. You’re also not able to claim back corporation tax on a cleared director loan.
Do I have to pay tax? “Bed and breakfasting”
As stated, if you pay off your loan within 9 months and 1 day of taking it out, you will not need to pay any tax. If you pay off the loan and then take it out again, straight after the tax deadline, you may receive a penalty from HMRC. This is called “bed and breakfasting” and HMRC has rules against this practice
Do I have to pay tax? Beneficial loans
Once the combined total of the loans you have taken from your company exceed £10,000 in the same financial year, the loans now may be taxable. The amount of tax you personally pay will be the difference between what you paid in interest and what you would have paid had you borrowed the money at HMRC’s rate (currently 3%). If there is no difference, there is no personal tax to pay.
If you are not being charged interest or the interest rate you’re paying is less than 3%, you will need to complete a P11D Working Sheet 4.
Directors’ loans – find out more
The taxation and treatment of director’s loans can be complicated, especially when your company is lending you money. For help and advice, please call 01235 768 561 or email email@example.com.