A guide to Director’s Loans
As a director of a company, it’s important to understand the concept of a director’s loan, so you know whether you are likely to trigger a tax charge or are in a positive position.
What is a Director’s Loan?
There are two ways of looking at a director’s loan.
1. Lending to your company – This could be to help with start-up costs, cover a cashflow hole, or when you’ve paid for a company expense personally. The company may consider paying interest on this loan.
2. Borrowing from your company – Money that you take from your company which is not classed as either a salary, dividend, company expense, or money you’ve previously lent to the company.
You must keep records of all money either loaned to or borrowed from your company, in order to keep track of amounts owed and lent. This is done by using a “director’s loan account”.
What is a director’s loan account?
A director’s loan account, commonly referred to as a DLA, is where you keep track of the money you’ve lent or borrowed from your company.
If you have lent your company money, you will be a creditor to the company. You are able to withdraw the amount lent to the company without paying income tax on the amount. Any interest paid to you on the loan would be subject to income tax though.
If you have borrowed more than you have lent, then your DLA is classed as overdrawn. There are risks and downsides to having an overdrawn DLA, so you should always try to be in credit or at least 0.
Key points when borrowing from your company:
It might sound appealing to borrow money from your company, but be warned, there are risks and potential tax consequences if this borrowing is not managed carefully.
When borrowing from your company,the company can decide what interest rate to charge on the loan. If the rate is lower than the official rate (currently 2.25% from April 2023), then HMRC may treat this as a benefit in kind and tax you on the difference. The company will also pay Class 1A NI at 13.5% on the value of the loan. If you borrow more than £10k from your company, this automatically is treated as a benefit in kind.
When you have borrowed from your company, it is strongly advisable to pay back the amount before 9 months and 1 day after your company’s year-end. If you don’t then the company will trigger a substantial corporation tax bill of 32.5%, referred to as Section 455 tax.
Once you’ve re-paid what you’ve borrowed from your company, you must wait at least 30 days before you take out another loan. If you seek to avoid the Section 455 tax by paying back your loan before the 9 month and 1 day deadline, and then take out another loan 30 days later, this is not looked on well by HMRC.
Borrowing money from your company should be done with caution and taking advice from your accountant.
It’s common to see monies drawn out of a company by a director/shareholder as dividends, monthly or annually. However, dividends can only be made if there is sufficient profit reserves in the company. Therefore, on occasion, if monies draw exceeds allowable dividends, then the DLA well become overdrawn.
Key points when lending to your company:
Lending your company money is much less complex than borrowing from your company. It’s most commonly done in the start-up phase, or to cover a gap in the cashflow.
Another very common example of crediting your DLA is when you make a purchase of goods/services on behalf of the company from your personal account or credit card.
It is possible to charge interest on money you lend to your company, but this is treated by HMRC as income and needs to be disclosed on your tax return, and the appropriate income tax paid.
If you have any questions regarding directors loans, please contact us on the details below.