Director loan is any money or tax-free loan that director of limited company takes out from his company bank account to spend on personal purchase i.e., new house, a car, or to spend on sudden unexpected car repairs, new investment, to fund sudden unexpected expenses and that is not
- a salary, dividend or expense repayment
- money you’ve previously paid into or loaned the company
Directors loan benefit in kind:
If director lend or borrow loans from his business bank account more than 10,000. It would be considered as benefit in kind and need to declare on director’s self-assessment tax returns or P11D and director will be liable to pay company tax, personal tax and class 1A National Insurance at rate of 13.8% on full amount.
How to record director loan or what is directors loan account?
Director keep record of transaction of any fund or money that is lent or borrowed from business bank account is classified as directors loan account. If you are sole director or shareholder, you must take approval from all shareholders of company before take out or borrow any money from your business bank account and must keep record of shareholder’s approval in written form.
You must keep the record in your directors loan account:
- Any cash withdrawals from the company that you’ve made as a director
- Personal expenses which were paid with company money or credit card
As HMRC deeply examine your director loan account through company’s annual tax returns to make sure that guidelines and rules are being followed, so you need to keep record of all transactions of company and personal finances to be valid to deep analysis by HMRC.
Director loan tax rules:
You have to repay the loan within the nine months and one day of company’s year-end. If you fail to repay the loan or company money that you owe within HMRC time frame then your company will be subject to additional corporation tax implications at the rate of 32.5% on outstanding or overdue loan amount and interest will be added on corporation tax until the corporation tax is paid and loan is repaid. You can reclaim your corporation tax on loan amount back after repaying your full amount of loan but not interest. For example, if you withdraw your director loan amount at your company year-end of 30th April 2020 then you will have to repay it by 1st Feb 2021 to avoid any penalty from HMRC. So, if you withdraw any director loan amount, you must repay it within HMRC time frame to avoid any penalty in the form of tax implication from HMRC.
Repayment of directors loan to company:
You can repay your directors loan by simply transferring the amount back into the company bank account or by assigning the salary or dividend payment against loan amount to reduce the balance. It is examined by HMRC that some directors use bed and breakfasting or tax avoidance method in which they repay their directors loan before company year-end or nine months to avoid corporation tax penalty and with an intention to take out another loan immediately without any intentions to repay it back. So, HMRC introduced the 30-day rule to avoid this tactic according to which director cannot withdraw another loan amount within 30 days after repaying the one and if this happens, director will be liable to pay tax on full amount of loan.
For example, if director withdraw another amount of loan that is £5,000 within 30 days in future after repaying the full amount of loan that was up to £10,000, then director will be liable to pay tax on £5,000 loan amount(or on full amount of loan that he withdraws within 30 days in future after repaying the one).
Please note HMRC discourage regular use of company funds as a directors loan account, we recommend avoiding the use of company funds to regular drawings.
Directors loan to company write off:
As directors withdraw loan amount with the intention to pay it back but due to some circumstances i.e., personal emergency or sudden cancellation of contract that disrupt company profit, they would not be able to pay loan amount back. In this situation company can write off overdrawn directors loan account by distributing a dividend if funds are available in company business account and company will have usual tax liabilities of Class NI and corporation tax on released loan amount and director will have to pay income tax on the loan through self-assessment tax return.
Lending money to limited company:
If you personally loan money through directors’ loan account, to pay start up business costs or to buy the assets and to invest money in to your company, your company will not be liable to pay corporation tax on any amount you loaned to your business or limited company. Your company pay you interest would be treated as
- a business expense for your company
- personal income for you
you need to report interest income on your personal self-assessment tax return and will be taxed accordingly.
Get advice from expert Berkshire accountants to get director loan:
If you are directors and want to get director loan from business bank account, you can take advice from our expert Berkshire accountants at Berkshire accountants limited to deal efficiently with your accounting and bookkeeping and tax implications needs on directors’ loan account.