What is a director’s loan?
HMRC classes a director’s loan as any funds taken from the company which are not a salary, expense, loan repayment or dividend.
Any other money taken from your company’s accounts, such as personal expenses must be recorded as a ‘director’s loan.’
Borrowing money from your own company is a perfectly legitimate way of propping up your own finances providing the correct records are kept.
During the current economic climate, it can be used – and is no doubt being utilised by many directors – to boost personal finances.
What are the tax rules for director loans?
If your Director’s Loan Account (DLA) is in the red by the time you reach your company’s year-end, you may be liable to pay tax.
However, if you pay back the entire director’s loan within nine months and one day of the year-end, you will not need to pay tax on the amount borrowed.
If you do not repay the loan within this timeframe, the amount is classed as ‘overdue’ and your company will be expected to pay additional Corporation Tax at 32.5% on the amount outstanding.
If the amount is not repaid, you may also be liable to pay personal tax at 32.5% of the loan amount.
If a director’s loan is written off completely, there are both tax and accounting implications so it is important to seek our expert advice before doing so.
Benefit in kind declarations
If you borrow over £10,000 from your company – at any time in the year – even if you pay it back on time, the loan is classed as a benefit in kind and as such it must be recorded on a P11D, meaning it is liable to both personal and company tax. Your company will also need to pay Class 1A National Insurance at 13.8% on the full amount.
Why ‘Bed and Breakfasting’ repayments are illegal
A ‘bed and breakfast’ deal occurs when directors intentionally attempt to avoid tax by repaying the borrowed amount just before their company’s year-end but then withdraw the amount again immediately after.
HMRC has now put a stop to such practices. Any loan over £10,000 which is repaid by a director, effectively halts any further loans over this amount for the next 30 days.
Making a personal loan to your company
Sometimes it may be necessary to provide an injection of cash to your company from your personal funds, often to alleviate temporary cash flow problems.
In such circumstances, your company is not required to pay Corporation Tax on money you personally lend it and you can withdraw the full amount from the company at any time.
If you charge your company interest on the sum, it is classed as a business expense for your company and personal income for you which is taxable and must be declared as income on your self-assessment form.
For help and advice with director’s loans, including effective tax planning, please contact us.