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By Lynne Gowers on 5th September 2018
When you choose to set up a limited company, it is a separate legal entity to you as an individual. This is one of the benefits of running a business in this way, as it offers you limited liability and you only risk what you put into the business. Therefore, the money in your limited company bank account does not belong to you.
However, as a company director, you can access it through something called a director’s loan.
This can be a useful facility if you need to fund a major personal purchase, such as a property deposit or unexpected car repairs. However there are certain rules and tax implications to be aware of.
Here’s a rundown of the most common questions clients ask us about taking a director’s loan:
A director’s loan is where you take money out of your limited company which isn’t a salary, dividend or business expense repayment.
If you take funds out of the company for any other reason, it is classified as a director’s loan. You must keep record of all such money borrowed or repaid and this record is known as a director’s loan account – or “DLA”.
The clue is in the name – you must be a director of the limited company.
HMRC keeps a close eye to director’s loan accounts through annual company returns, so you need to ensure your records are complete and accurate.
In your DLA, you should record:
Depending on the borrowing repayment activity in your director’s loan account, at the end of your company’s financial year, either you will owe the company money, or the company will owe you money.
This should be recorded accordingly as an asset or a liability in the balance sheet of your company’s annual accounts. There is a requirement to disclose this in your annual accounts as a related party transaction.
Director’s loans are used when you need to access the money in your limited company, other than what you take out as salary, dividend or business expense repayments. They can be used for when your personal finances need a boost, perhaps due to an unforeseen outlay.
Director’s loans can also be a useful tool to bridge the gap temporarily until company profits allow dividends to be paid out.
Director’s loan accounts work both ways. The company’s expenditure can be funded by loans from its directors which can then be repaid when the company’s funds allow.
The tax implications of a director’s loan will depend on when you pay it back. If you pay back the whole amount within nine months of the company’s year-end, you won’t have to pay tax on it. An overdue director’s loan will attract Corporation Tax at 32.5%.
A word of warning – you should avoid repaying a loan and then taking it out again soon after. This is an avoidance tactic which HMRC call “bed & breakfasting”. If they pick up on such activity, they will treat the loan as never having been repaid and tax the company accordingly.
Any interest-free loan of over £10,000 will be classed and treated as a benefit in kind and will need to be recorded on a P11D and Class 1A National Insurance is payable by the company at 13.8%.
If you borrow (or lend) money to your company via a director’s loan account, the interest rates charged or received will affect the tax due. This is a complex area and you should take advice from your accountant, or see the HMRC guidance here.
An overdrawn director’s loan account is where you, as a director, have taken money from the company that is not salary or dividend and the amount exceeds what you have put into the company.
As we have described above, you have nine months from your company’s year-end to repay a director’s loan. The key thing to remember is that while it remains unpaid, it is considered a company asset. This means, if the company is insolvent, a liquidator is likely to pursue the balance of the loan.
When companies face financial problems, a high number will feature an overdrawn director’s loan. While the company itself can “write off” the loan, it is not uncommon for a liquidator to reverse this and ask the company director to repay the loan in order to pay the company’s creditors.
While it is possible for a director’s loan to be written off, the implications to the company and your tax position of doing so should always be discussed with an accountant.
The Boox accounting app allows you to easily view and manage your director’s loan account. You can take out a new loan and make repayments, while all activity is recorded securely within the app and reconciled with your company bank account.
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