Director’s loans – can you get a loan from your company?
A director can loan money to or receive a loan from a limited company but it is important that the tax implications are understood to avoid any surprise tax bills.
Loaning money to a limited company
A director can lend money to a limited company if it needs to. An example of this may be to fund the business bank account when first setting up. There is no limit to how much you can lend to the company or for how long. So £1,000 deposited into the business bank account to get you through the first few weeks or months of setting up in business can be paid back to the Director as soon as the company can afford to do so without any tax implications.
Interest can be charged by the director for a loan made to the company. The company would receive a tax deduction in the form of Corporation Tax relief however the director would be subject to tax on the interest received from the Company.
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Receiving a loan from a limited company
There are a couple of taxes to think about when taking a loan as a director or employee of a limited company.
- Tax paid by the company
Called S.455 and paid by the Company at a rate of 32.5% this is an important one to get right. S.455 tax is paid on the balance of any loan taken from the company by a director or employee that remains outstanding 9 months after the company year end.
Example:
A £25,000 loan is taken by J. Smith, Director of J Smith Engineering Ltd during the company year ended 30 April 2018. J Smith subsequently paid back £5,000 on 30th June leaving £20,000 still outstanding 9 months after the year end 31 January 2019. A s.455 tax is payable by J Smith Engineering Ltd totalling £6,500 (£20,000 x 32.5%) by 31 January 2019. This tax is repayable by HMRC back to the company once the Director has repaid the loan or part of it.
- Tax paid by the Director
A company can make an interest free or low interest loan to its employees or directors free of tax and National Insurance implications if it is below £10,000. Loans above this amount are subject to tax and National insurance on the employee as a benefit in kind and subject to employers NI for the company. This tax charge can be avoided by charging a market rate of interest on the loan (HMRC rate is currently 3%). The interest charge can be added on to the loan amount or it can be paid directly to the company by the director/employee.
Tips:
- A loan can be documented using a board resolution and kept on file.
- A directors loan is a useful way of getting money out of a company for short term purposes to avoid paying higher rate taxes on a dividend or directors remuneration.
- Key figures – below £10,000 to avoid benefit in kind tax charge and to be repaid within 9 months of the year end to avoid s.455 tax at 32.5%.
What else should you know? Learn 5 things you should know about Director’s Loans, click here.
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Note: All the information and advice in this blog post was correct at the time of writing.
