If you’ve set up a Limited Company, you’ll no doubt have heard about Director’s Loans. As a Director, its important you understand what these are, how they work and how they can impact you.
As a Limited Company owner or Director, there are a number of benefits. A Limited Company is a separate entity, therefore provides you and your fellow Directors with Limited liability. You therefore only risk what you put in, your house and car aren’t on the line.
This also means that any money within the company is not yours, unless you take it out through Salary, Dividends or, indeed, a Director’s Loan.
What is a Director’s loan?
A Director’s Loan is money that you take from the company accounts, without it being Salary, Dividends or a business expense repayment. Some Directors may take out a loan from the company to use as money for a large expense they have.
As you might expect, the money needs to be repaid at some point, and as a result the loan will show as an asset on your Balance Sheet.
Conversely, A Director’s Loan also applies when a Director injects money into the company, for example, during the start-up process. In this instance, you would become a creditor of the company.
What Are The Rules Around Director’s Loans?
Director’s Loans need to be recorded on your filed annual company accounts. Within these accounts you keep what is known as a Director’s loan account. This contains information pertinent to the loan, including purchases made with the company money, withdrawals, repayments and interest added to the loan.
You may also be subject to tax, depending on when you pay the loan back. If you don’t pay the loan back within 9 months of your company’s year-end, then you will be subject to 32.5% tax. If the loan value is over £10k and is interest free, then it will be classed as a benefit in kind, which attracts tax of 13.8%, payable by the company. The tax is recorded as an asset rather than an expense. So, when the loan does get repaid, you can reclaim the tax asset.
You may think you can get round the 9-month rule by paying back and then taking another loan from the company soon after. HMRC are wise to this, and will class the loan as not paid if they see this activity on your account. They’ll then tax you for the full amount, so be warned! You need to wait a minimum of 30 days between repaying one loan and taking out another. However, even this is risky and could incur the wrath of HMRC, so we advise to try to take as few Director’s Loans as possible.
With regards to the interest you pay, that’s actually up to the company. However, be aware that if you charge interest below the official rate (2.5% as of the 19/20 tax year) then the loan will be treated as a benefit in kind. This means you’ll pay Class 1 National Insurance of 13.8% as above.
Director’s Loans, whilst can provide a source of short-term income, should really only be used as a last resort. The potential tax implications are severe, especially if the loan is not repaid promptly. You should always repay the loan within 9 months of your company’s year end.
You should also try to ensure the loan does not exceed £10k. Not only may your fellow Directors not take too kindly to this, but also you will incur p11d tax as it will be treated as a benefit in kind.
Director’s Loans have several rules that you must abide by. Ensure that you don’t overdraw on your Director’s loan account for long periods. It is also advisable to keep on top of bookkeeping and accounting, so you’re fully aware of the precise financial position of your company.
This is where a great accountant comes in. At iFinance Department, not only will we keep your books and accounts up-to-date and accurate, but we can also advise on financial opportunities, your current financial position and take care of the Director’s Loan process and compliance. We’d love to hear from you, so get in touch for your free financial consultation.