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If you’re a contractor working through your own company, you might think there wouldn’t be a problem if you borrowed money from or loaned money to your business from time to time, as long as it’s paid back.
Sadly it’s not quite as simple as that, and loaning money to and from your company can carry additional tax implications. With this in mind, it’s essential that you’re fully aware of your options and obligations should you decide to make use of what’s known as a director’s loan.
To help you avoid any slip-ups, in this article, we set out all of the key information on director’s loans.
A director’s loan is either money borrowed from the company by one of its directors or money loaned to a company from a director personally.
HMRC defines a director’s loan as money taken from a company that is neither:
There are strict rules around taking a director’s loan. So, it’s essential to understand how they work and what your legal responsibilities are when loaning or borrowing money.
Any company director can take out director’s loans. Like any loan, it must be repaid.
They give you access to finances above and beyond dividends or salaried income. You might also want or need to utilise them to help your company resolve any short-term cash flow issues.
Typically, director’s loans are used to cover one-off costs like an unexpected bill or to help to ease personal financial issues directors are experiencing for a period of time.
There’s no upper or lower limit on your loan amount. But make sure you have the profit or cash available to borrow money that hasn’t already been earmarked for other liabilities, such as your company’s Corporation Tax bill. Needless to say, HMRC could take a dim view if you can’t make any tax payments on time, particularly if you’ve taken a loan personally from your business.
Director’s loan tax
There are two types of tax charges which you may incur when using a director’s loan. These are the S455 charge and the BIK charge.
S455 Tax Charge
Whatever the value of your loan, if you repay it in full before nine months and one day after your company year end in which you took out the loan, there won’t be any S455 tax implications.
If you haven’t repaid the loan in full within this time, any loan taken in the company year and still outstanding nine months and one day after your company year end will be subject to a S455 tax charge.
This is chargeable at 33.75% of the outstanding value of the loan at that time, and is the equivalent of what you would have paid in tax had you declared the loan as a dividend at the higher rate tax band.
S455 tax is a temporary tax though, and so unlike when declaring dividends – where you’ll pay a permanent higher tax – once you’ve repaid your director’s loan in full, you can reclaim the S455 tax back from HMRC, and our accountants here at SJD will help you do this.
Along with S455, if the total value of your loan exceeds £10,000 in a year, then you may also incur a Benefit in Kind (BIK) charge.
A Benefit in Kind (BIK) is a benefit that employees or directors receive from a company which is separate from their salary. Because these benefits have a monetary value, whether a car or, in this case, a director’s loan, they’re treated as taxable income.
To avoid incurring a BIK charge on a directors’ loan, you can repay interest to your company on the outstanding loan value at HMRC’s recognised interest rate.
As things stand, HMRC’s interest rate for director’s loans is 2%, which would be payable to the company on the value of any loan outstanding. Although, as a director, you can choose the interest you charge yourself for the director’s loan.
But bear in mind that if it falls below the 2% rate, then the BIK tax charge will apply. This can mean additional personal tax for you and employer national insurance being incurred by your company.
If you’re confused or want to find out if paying interest or the BIK charge is better for you, don’t hesitate to contact us.
Sometimes you may need to lend your company personal money, to boost your cash flow. For example, you might have just started your company and need money in your business account to cover set-up costs.
Any money you lend to your limited company will sit as a credit in your directors’ loan account as money owed by the company, but to you. When your company has enough profit and cash in the company to be able to repay the loan to you, you can just withdraw it from the company without any tax implications.
Yes. Director’s loans need to be recorded for accounting purposes. If there’s more than one director in your company, they must maintain a record of any lending through a director’s loan account (DLA).
A DLA is a ledger of transactions made between any director and the company, and a record of what’s owed in each direction. By law, every director needs a DLA should they use a director’s loan.
When the money is loaned from a director to the company, the DLA is considered in credit; in the other direction, the account is deemed overdrawn.
There are a few ways to repay a director’s loan taken by a director:
Whichever method you choose, remember to keep a record of how and when the payment was made, via your DLA.
Like any financial borrowing, it’s essential to repay any loans on time. Too much money loaned out for too long may become a cause of concern for other directors or creditors (if your business has either).
The timing of repaying loans and taking another in quick succession also needs considering, as HMRC have a ‘Bed and Breakfasting’ rule. This has implications for loans repaid, with another taken out within 30 days. Under this rule, the repayment is not seen as repaying the original loan, only the new one, and so potentially leaving you with tax to pay on the original loan.
To recap, director’s loans give you the freedom to borrow from or loan money to your company. Provided the loan is repaid within nine months and one day of the company’s financial year-end – and does not total more than £10,000 in the year – you won’t accrue further tax or interest charges.
While director’s loans can be complex, the proper support will help ensure you use them in the right way. For more information or any other accounting support, please get in touch with one of our experts, who will be delighted to answer any questions you have.
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