Limited company directors have the ability to borrow money from their business, but the implications of doing so can get complicated.
That’s because the company is a separate legal entity, so there are rules around taxes and recording the withdrawals.
HMRC defines director’s loans as withdrawals from your company that aren’t:
You record all other withdrawals in your director’s loan account. The ‘account’ part of the term isn’t a physical account – it’s the record you need to keep of the money that you withdraw and pay into the company.
Each company director has to have their own loan account. When it comes to actually keeping the records, many accounting software packages have the ability to track director’s loans.
But as an overview, the account should show a director’s:
Your company accounts should also reflect all the money withdrawn and paid back.
Tax on directors loans is where it gets complicated. Your (and your company’s) tax obligations depend on whether you owe your company money (your account’s overdrawn) or whether your company owes you money (your account’s in credit) at the company’s Corporation Tax year-end.
This guide assumes that you’re both a company director and shareholder.
Your personal and company tax responsibilities change the longer you take to repay the loan.
You don’t have any personal tax to pay if you pay the loan back within this time.
Your company will need to use form CT600A to show the amount owed at the end of the accounting period on the company tax return.
Your company won’t have a Corporation Tax liability, unless:
When you repay the loan, you can reclaim the Corporation Tax, but not interest.
There’s no personal tax to pay. But it’s in your company’s interest that you repay the loan within nine months of the company year-end because of the Corporation Tax liability after that:
You can reclaim the Corporation Tax, but not interest.
You have to pay personal tax on the loan through your Self Assessment. This is at the dividend higher rate threshold of 32.5 per cent.
Your company deducts Class 1 National Insurance through payroll.
If you owe more than this at any point in the year (interest-free), it counts as a benefit in kind for your company and you need to deduct Class 1 National Insurance (at 13.8 per cent on the full amount).
Your company needs to record it using form P11D – and as an individual, you need to record the benefit on your Self Assessment.
Gov.uk says you may have to pay tax on the loan at the official rate of interest.
If this interest is below the official rate, then this is recorded as company income and treated as a benefit in kind.
You report the interest on a Self Assessment tax return. Gov.uk says you may have to pay tax on the difference between the official rate and the rate you paid.
Your company can reclaim Corporation Tax but only after a significant amount of time has passed, which is why it’s best to repay the loan within nine months of the end of the year-end accounting period.
Gov.uk says HMRC won’t repay Corporation Tax until “nine months and one day after the end of the Corporation Tax accounting period when the loan was repaid, written off or released”.
This has the potential to significantly affect your company’s cash flow, so it’s best to carefully consider your options.
You need to reclaim Corporation Tax within four years.
Your director’s loan account might be in credit if you’ve put funds into the company for expansion, for example, or you’ve paid for business expenses personally.
Your company doesn’t have a Corporation Tax liability, but you might have some responsibilities if you charge interest. That’s because interest counts as:
You can draw on the balance in credit without any tax implications, but remember everything needs to be recorded.
As with company taxes in general, the director’s loan account is a complex topic, involving different rules and responsibilities depending on your (and your company’s) situation. Please treat this article as a guide only and get professional advice if you’re not sure about anything.
Read more about the director’s loan account at gov.uk.
We create this content for general information purposes and it should not be taken as advice. Always take professional advice. Read our full disclaimer
22 June 2020 • 9-minute read
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