This WKM guide explains what director’s loans are and when you might want to consider making one. It goes on to outline how this type of loan works in practice, exploring the tax implications associated with a director’s loan as well as the repayment process.
What is a director’s loan?
A director’s loan is a means of taking money out of your business separate from your usual salary, dividends, and expense repayments.
As a director, it’s essential that you keep a director’s loan account or DLA (a record of all of the money that you borrow from and/or pay into the business). At the end of each financial year, you have to submit these details as part of the balance sheet in your company accounts.
When preparing the DLA ahead of submitting your accounts, make sure to include all of the following information:
- Full details of all withdrawals and repayments you’ve made;
- The amounts of any personal expenses that you’ve paid with company money or a company credit card;
- Any interest that’s been charged on your director’s loan during the year.
How do director’s loans work?
As a director of a limited company, you’re entitled to borrow money from the business in the form of a director’s loan. There is no limit on the amount that you take out in this way, but the other directors must all be in agreement and you must pay tax on the loan (more on this below).
It’s important to note that director’s loans work both ways – that is to say, as well as temporarily taking money out of an organisation, a director can also put funds into an organisation via this type of loan to provide some initial investment.
What are director’s loans used for?
This kind of loan is used in situations where a director needs money to resolve a temporary issue with their personal finances; similarly, it’s common to use a director’s loan as a means to pay directors until a company has made enough profit to make paying out dividends a viable option.
In certain cases, they are even used as a source of funding for a director’s new business project.
Tax on director’s loans
As mentioned above, you and your company may have to pay tax on director’s loans. The tax implications differ depending on whether you borrowed or loaned money.
In a situation where you loaned the firm money, your company would not have to pay corporation tax on the loan and the process is relatively simple. However, if you charge any interest, then you must report this as a form of income on your Self-Assessment Tax Return.
The rules get a bit more complicated if you borrowed money in the form of a director’s loan. In this case, the tax implications for your business depend on the amount and the timeframe in which you settled the loan:
- If you repay your loan within 9 months of the end of your financial accounting year, then you won’t pay any tax on the loan.
- If you do not repay the loan within 9 months of the end of your financial year, then your company will pay additional Corporation Tax at 32.5%, regardless of the amount (although this can still be claimed back).
If you owe more than £10,000 at any point in the year, this will be taxable to both company and personal tax. You must report the loan on your P11D. In addition to this, your company must:
- Treat the loan as a ‘benefit in kind’;
- Deduct Class 1 National Insurance.
Repayment of director’s loans
The best way to repay a director’s loan is to do so as quickly as possible (ideally within 9 months of the end of your firm’s financial account year). This is particularly important if the loan is more than £10,000 due to the hefty 32.5% Corporation Tax on the original amount – you can claim this back, but not the interest, so an early repayment is a more tax-efficient option overall.
Another top tip when it comes to repayment: never repay a director’s loan and then take it out again shortly afterwards. HMRC refers to this tax avoidance trick as “bed and breakfasting” and will come down heavily on you, taxing your business as though the loan was never repaid at all.
We hope this guide has given you all of the information you needed about the process of making director’s loans and the tax implications. If you’d like to chat about any of the topics raised here or discuss how WKM can help your business, don’t hesitate to get in touch.
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