Borrowing money from your Limited Company and the associated tax risks

You may find from time to time that you need to borrow money from your Limited Company, but how do you go about it, what are the associated tax risks, and is there anything you need to be aware of?

In this blog we take a look at all this, to ensure you know the facts before taking money from your company.

How does it work?

Regardless of the loan period or amount you’d like to borrow, first things first is you’ll need to know how much is in your business bank account so that you know how much you have in order to account for tax, any staffing costs, and other business depreciation elements.

Taking money legally out of your Limited Company

There are various ways of taking money from a ltd company including:

1. By paying yourself a director’s salary
2. By issuing dividend payments from available profits within the company
3. In the form of a director’s loan
4. By claiming expenses for business-related items

A director’s salary

Most Limited Company directors will pay themselves a salary through PAYE. Depending on the amount you pay yourself, you may need to pay National Insurance Contributions (NICs), and/or income tax. All salary payments are a tax deductible expense, therefore your company won’t have to pay any Corporation Tax liability on this money. Your company will however, still need to pay 15.05% Employer’s NICs on any salary earnings that fall above the NIC Secondary Threshold of £9,100 (for the 2022/23 tax year).

Paying yourself a salary up to the NIC secondary threshold of £9,100 means no income tax or NI is payable. This value still allows you to qualify for the State Pension and any benefit entitlements, as your income exceeds the Lower Earnings limit of £6,396 pa.

Another popular salary level taken by directors is the tax-free Personal Allowance of £12,570, whereby you won’t be liable to pay Income Tax, but you will need to pay employee NIC contributions on any earnings between £11,908 and £12,570.

Dividend payments

Any shareholder of their Limited Company is able to take profit from the company in the form of a dividend. You are only able to do so once there is profit in your company, otherwise the dividend will be classed as ‘illegal’.

The total you’re able to pay yourself is dependent on the number of shares you hold, for example if you hold 100% of the shares then you’re able to take the remainder of profit out of your company once all costs have been accounted for (ie tax, expenses, etc).

All Limited Companies pay 19% Corporation Tax on taxable income (this will increase to 25% for all profits in excess of £250,000 from 1 April 2023). The first £2,000 of annual dividend income is taxed at 0%, and free from NICs and Income Tax. Any amount exceeding the £2,000 limit will be subject to dividend tax that’s based on your Income Tax band (basic, higher or additional rate tax).

Before paying out dividends you must declare the dividends to the board, and make a record of the meeting minutes. This provides a solid paper trail of what activity has taken place, the amounts issued to whom and when.  You must also keep a record of a dividend voucher, which will also display the dividend details.

Director’s Loan

By taking money from your Limited Company in the form of a Director’s Loan, you’re able to:

1. Lend money back to your company
2. Borrow more money from your company than the amount you originally paid in
3. Reclaim any money you originally put into the company

A record of Director’s Loans must be kept and maintained in a Director’s Loan Account, which must be shown as part of your company’s balance sheet.

It’s worth noting that should you decide to take out more money than what has been paid into your business, your Director’s Loan Account will become overdrawn, and there are tax implications from doing so. If your company owes you money, then your loan account will be in credit and you’ll be able to take out money without facing any tax liabilities.

For example – if the amount you owe your company is less than £10,000:

• There are no personal tax liabilities, but there might be tax consequences for your company

If your loan is overdrawn for more than 9 months following your company year end (your companies filing deadline). If this is the case, the company must pay Section 455 Tax on the full amount overdrawn

• Section 455 Tax carries a 33.75% tax charge (32.5% for loans prior to 06/04/2022) which your company is liable to pay alongside its Corporation Tax liability
• Any outstanding loan amounts must be displayed on your company’s tax return

If the amount you owe your company exceeds £10,000 at any point:

• There might be tax consequences for your company if your loan is overdrawn for more than 9 months from your company year end. If this is the case, the company must pay Section 455 Tax on the full amount overdrawn
• Section 455 Tax carries a 33.75% tax charge (32.5% for loans prior to 06/04/2022) which your company is liable to pay alongside its Corporation Tax liability
• Any outstanding loan amounts must be displayed on your company’s tax return
• When a director’s loan exceeds £10,000, if you repay the loan to the company with interest applied (at HMRC’s official rate of interest) the loan will not be classed as a taxable benefit.
• If the loan is not repaid to the company with interest, you will need to declare the loan via your company P11D and your Self-Assessment Tax Return. This is because it is deemed as a benefit in kind for the Director to receive an interest free loan from the company.
• The value of the benefit will be calculated at the official rate of interest. Class 1A national insurance at 15.05% will then be payable from your company via form P11D and the benefit will also be included within your personal tax return, taxed at your appropriate rate of tax.

What you need to record when it comes to Director’s Loans:

• The value of money a director gives the company, excluding any share payments they may take
• The total value a director may borrow from the company
• Any interest that may be payable on that loan

These records are traditionally kept within the Director’s Loan Account. Depending on how much is borrowed, it may be subject to certain types of tax, therefore it’s advisable to discuss your plans with your SG accountant before borrowing any money out of your Limited Company.

If your Director’s Loan Account has zero balance or is in credit

If the amount you take out is less than the total balance you’ve put in, you’re not borrowing any money, and are therefore claiming funds which you’ve already paid in.

The Director’s Loan Account will either show a balance of nil or remain in credit, depending on the total amount you draw out. You’re able to take out the available money at any given time without any tax implications, so long as your account is in credit.

What happens when your Director’s Loan Account is overdrawn?

If you take out more than what’s already in there (discounting a salary payment, dividend or expense) the withdrawal is a benefit and will therefore be classed as a Director’s Loan. This will in effect make your Director’s Loan Account overdrawn.

Your Limited Company’s financial year

Should your account remain overdrawn 9 months after the end of the accounting period, then HMRC will charge you S455 Tax at a rate of 33.75% (32.5% for loans prior to 06/04/2022). You can, however, claim the paid tax back once you’ve paid the full amount of overdrawn money to your Limited Company.

Expenses

You’re able to reclaim the cost of expenses, so long as they were purchased solely for the purpose of the business. In order to do so, you must keep a record of all receipts. You’re able to claim tax-deductible expenses in the following form:

• Parking and mileage costs
• Travel and accommodation
• Mobile phone contract costs
• Entertainment
• Food and drink
• Computer and office equipment
• Training costs
• Postage costs

If incurred personally on behalf of the business, you’ll be reimbursed these amounts by your company when you’re paid either weekly or monthly, or at any other time during the month that’s convenient to you. Your company must keep receipts of all expenses for a period of 6 years along with a record of what the expense was and what it was needed for.

How your SG Accountant can help

Tax is confusing, especially when it comes down to working out your % margins, what taxes are due and when, and how much extra you could end up paying if you get your numbers wrong. That’s where your expert SG Accountant comes in handy, to help you navigate the complex world of running your Limited Company. If you’re considering borrowing money from your company get in touch with your accountant today.