Directors Loan: 5 things you should know

It’s not a well-known fact, but it is possible to loan money from your limited company. This is referred to as a Directors Loan, and it is defined as “money which is taken out of a limited company which isn’t a salary, dividend or expense repayment.”

Some individuals may prefer to borrow money from their ltd company than taking out a loan from a bank or spending money on a credit card. However, you could end up with a big tax bill if you don’t understand how a Directors Loan works.

Here are 5 things we feel you need to know before taking a Directors Loan:

1. Only directors can take out a loan

It may seem obvious, but only a director of the limited company is entitled to take out a loan from the company. An employee can take out a loan from their employer although similar rules it would be classified differently.

2. Big brother is watching you

HMRC- the gate-keeper of all things tax related, keeps an eye on everybody who takes out a Directors Loan. They’re able to do this as they can see it on your annual company’s return.

It’s therefore vital that your Directors Loan Account is accurate and that you keep up to date records which details:

* Cash withdraws and repayments you make

* Any personal expenses paid with company money or on a company credit card

* Interest added to the loan

3. You can use the money for anything you like

There are no restrictions on what you can use the loan for. It could be that you’ve personally had an expensive couple of months and you need the money to cover credit card repayments. You may need to purchase an expensive piece of equipment. Or, it could be that you need the money to start a new business.

4. To avoid paying tax repay the loan on time

The rules state that you have to pay back the loan within nine months of your company’s year-end in order to avoid paying tax on it. Therefore, timing is key. For instance, if you take out the loan on the first day of your company’s accounting year, you effectively have 21 months to pay it back!

5. Complex tax rules exist for Directors Loans

If you pay tax on a Directors Loan depends on when you pay back the loan. If you fail to pay it back within nine months of the company’s year-end it will be classed as an

overdrawn directors account and Corporation Tax at 32.5% will be due. This is ultimately refunded by HMRC if the loan is repaid in the future though. Be careful as it’s going to take at least a year to get it back though. Additionally, unpaid loans are seen as a company asset, and if the company goes ‘bust’ the liquidator may pursue you for any monies outstanding from the loan.

If the loan is over £10,000 it will be treated as a ‘benefit in kind’ which then has to be recorded on the form P11D. The company must also pay Class 1A National Insurance at the rate of 13.8%.

We always advise the contractors we work with to approach Directors Loans with caution. Whilst, they can be used to help you out in times when it’s not possible to take a salary or dividend from the company, you could end up with a hefty bill if it’s not paid back on time.

If you interested in finding out further details on Directors Loans, speak to us on 01962 867550 or send us a message via our website.