What is Director’s Loan?
As a limited company director, the funds you withdraw from the company may be treated as a loan to you from the company; this is a Director’s loan. All such transactions have to be recorded accurately under a Director’s Loan Account (DLA).
HMRC simplifies the definition as any money taken from the company by you, as a director (or a close family member) that is not:
Any such money transfers will need to be recorded in Director’s Loan Account and there are tax implications that should be carefully considered. These will depend on the closing balance of Director’s Loan Account at your company’s financial year end.
The company or director may personally be liable to pay tax on director’s loans. Tax implications depend on closing position of Director’s Loan Account:
The company owes you
If the director’s loan account is in credit, it essentially means that you have either paid into the company, loaned to the company or simply have taken less than you are owed for your salary, dividend and expense reclaims.
If you charge interest to the company on this loan, this will have to be declared as your personal income on your Personal Tax Return.
The interest will be a business expenses for the company and can be claimed against profits, however any interest paid to directors will need to be after income tax deduction and deductions to be reported to HMRC on quarterly basis.
You owe the company
If a director’s loan account is overdrawn, meaning you owe company money, you and/or the company may have to pay tax on the outstanding amount.
If the loan amount is not repaid within 9 months of company’s corporation tax period end, the company will have to pay 32.5% corporation tax on the sum. Regardless of the amount and payment date, the amount outstanding will need to be included in company’s corporation tax return CT600.
Corporation tax paid on the loan can be reclaimed if the loan is permanently repaid, however, any interest on corporation tax cannot be reclaimed.
Written off Loans
If the loan is written off, the company will need to deduct class 1 N.I using its PAYE and the director will need to declare the written off loan amount in a Personal Tax Return which will be subject to Income Tax.
Loans over £10,000
If the loan amount is more than £10,000 at any time in the year, the company must treat the loan as ‘Benefit in Kind’ and deduct Class 1 N.I. The director will also need to include the loan on Personal Tax Return and the amount will be subject to Income Tax.
Interest on Loans
Interest on director’s account needs to be above the official rate however, If the interest paid on any loan is below the official rate, the difference will also be treated as a ‘Benefit in Kind’ and be dealt with accordingly.
Director’s Loan remains a highly complex area of the legislation and it is highly advisable to seek professional guidance from your accountant to fully understand the tax implications before a loan is considered.