Directors loan : interest , repayment and tax implications

A directors loan is taken against their own limited company and shall outline the tax implications.

Why a directors loan ?

A directors loan can be used for a house deposit, for major business purchases or even personal purchases.

Before taking a loan out against your own company, you need to know about how these loans are treated.

Otherwise you could face a huge tax bill if you don’t play by the rules.

It’s not just the purpose of the loan that you should consider, but the tax implications of taking a loan out against your company.

There are three taxes that should be considered.

  • Section 455 tax on the overdrawn loan, which is Corporation Tax
  • Self-assessment higher rate tax on a dividend
  • PAYE, a benefit in kind on a directors loan

If your company has to tell HMRC that your director’s loan exists, you may have to pay tax depending on when the loan is repaid.

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What Is A Directors Loan?

You already know that the money in your company account doesn’t belong to you personally, but you do have access to it and this is through a director’s loan.

This money is defined by HMRC as money taken from the account that isn’t either of the following:

  • A salary, expense repayment or dividend
  • Money that you have previously loaned or paid into the company

So, if you choose to take some cash out of the company for any other reason, this has to be recorded in your personal director’s loan account.

You’ll either owe the company money or the company will owe you at the end of the year.

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Why Would A Director Need A Loan?

Directors take loans from their business for many reasons.

Sometimes, it’s for covering sudden bills that weren’t accounted for and other times it’s for personal expenses like a holiday.

It needs to be subjected to the right tax – personal or company – if it hasn’t already, and HMRC will want that paid.

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What Are The Directors Loan Rules?

At the date of your company’s year end, you may need to pay tax if your director’s loan account is overdrawn.

Paying back the whole loan in nine months of the company’s year end is the best thing to do, as you won’t owe any tax.

Example of directors loan rules:

  • If you take a loan in March 2018, and your company year end is April 2018, you have to pay the loan back by February 2020.
  • An overdue loan will be subject to Corporation Tax.

Your company is legally separate, so you need to record director’s loans.

It has its own statutory obligations and accountability, so everything that goes out has to be written down.

If you lend any money to your company or you take a loan from the company, you need to check out the Gov.uk site for the various rates and rules on interest charged.

Speaking to a reputable accountant like Universal Accountancy is also a good way to ensure that you don’t end up owing HMRC cash.

You have to record an outstanding loan or a loan that you are currently paying as a current liability.

Any remaining amount has to be written as a long-term liability.

If your company writes off a director’s loan, you need to think about the implications in terms of taxes.

You need a conversation with your accountant.

When you lend money to your company, your company will not pay corporation tax on the money that you lend it.

If your company pays you interest on the loan, you need to deduct the income tax at 20% from the interest it pays you.

This interest received on your tax return has interest that needs to be declared.

The tax consequences are more complex when you borrow money, though, and if the money was more than £10,000, your company has to treat the loan as a benefit in kind and deduct Class 1 National Insurance Contributions.

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Recording directors loan

Using the right accounting software can helps to keep track of your expenses and record your directors loan properly.

This is so important, because you need to know when to pay tax and how much to pay.

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Discuss directors loans with Universal Accountancy

To discuss a directors loan and the implications surrounding taxes, speak to Universal Accountancy today.

You could get the right guidance by the experts and know exactly what to do with your directors loan.

Contact us