A director's loan can occur when a company director borrows money from their company that isn't classified as salary, dividends, or expense reimbursements. It can also refer to when a director lends personal funds to the company. These transactions should be diligently recorded in a Director's Loan Account (DLA).
Money out of the company
When a director wants to withdraw funds from the company for use as a loan it needs to be recorded in a DLA and described as thus. Additionally, having a formal loan agreement between the director and the company provides further evidence and helps ensure compliance.
If the total borrowed exceeds the total lent to the company, the DLA becomes overdrawn. Directors typically clear this overdrawn balance shortly after the company's financial year-end by declaring dividends, paying a bonus, directly repaying the loan or formally write off the debt.
Tax implications of taking money out:
- Loans exceeding £10,000: If a director's loan surpasses £10,000 at any point, it is considered a benefit in kind. The director must report this on their Self Assessment tax return and may incur income tax on the benefit. Additionally, the company is liable for Class 1 National Insurance contributions on the loan.
- Repayment timeline: Loans should be repaid within nine months after the company's financial year-end. Failure to do so results in the company facing a Corporation Tax charge of 33.75% on the outstanding amount, known as section 455 tax. This tax is refundable once the loan is repaid although it should be noted that this cannot be claimed until nine months and one day after the end of the accounting period in which the loan was repaid.
- Increased salary/bonus: Before considering a pay rise or bonus to generate the necessary funds for repayment. Remember, this option incurs income tax and National Insurance contributions.
Money into the company
There are times when a company may need funding, when starting up or periods of growth for example. In these cases, a director can move money into the company as a loan, usually without any tax consequences. The money can be paid into the business bank account and then eventually repaid by the company when available. Directors may also charge interest on these loans. Interest paid to directors can be tax-free, provided it remains below the individual's annual personal savings allowance. Interest payments must be processed in accordance with HMRC's CT61 rules.
Ensure it's done correctly, we're here to help
Directors can often unintentionally complicate their finances by withdrawing company funds without the following the proper steps, this can lead to creating unnecessary Director's Loan Accounts when the money could simply be salary, dividends, or reimbursement of legitimate expenses. To prevent this confusion, ensure you have the correct guidance day 1, get in touch with us for personalised advice tailored to your situation.