How are Director’s Loans taxed?

A Director’s Loan can be taken when you need money to cover a personal expense, or if you need to purchase a new piece of work equipment, for instance. In fact, there are no rules detailing what the money can be used for, but there are strict rules governing what taxes are due on a Director’s Loan.

For a full explanation of what a Director’s Loan is and how they are taken, please see our guide, ‘Everything you need to know about Director’s Loans.’

“Are Director’s Loans taxable?”

This has to be the most frequently asked question relating to Director’s Loans. And, it’s not straightforward.

If taxes are due on a Director’s Loan, it depends on how much is taken and when it’s repaid. Let’s see how it works:

Corporation Tax

If you repay the full amount of the loan, within nine months and one day of your company’s year-end, you won’t have to pay additional Corporation Tax at 32.5%, or Section 455 CTA Tax as it’s also referred to.

e.g. If you borrowed £10,000 on 28th March 2019 and your company year-end is 31s March 2019, you have until 1st January 2020 to pay it back.

However, if you fail to repay the full amount within this time, additional Corporation Tax (Section 455 CTA Tax) is due on the outstanding amount.

e.g. If £5,000 of the loan is outstanding, you may have to pay £5,000 x 32.5% = £1,625 Section 455 CTA Tax.

Unlike many other forms of taxes, you can claim Section 455 CTA Tax back from HMRC, once you’ve repaid the entire loan.

Reclaiming Section 455 CTA Tax

HMRC will refund your Section 455 CTA Tax, nine months and one day after the accounting period in which you repaid the loan.

e.g. If you fail to repay the loan by 1st January 2020, repayment falls into 20/21 financial year which ends on 31st March 2021.

This means that the money won’t be refunded until 1st January 2022. This is quite a delay, and contractors aren’t often aware of this. So, it’s something to bear in mind when taking a Director’s Loan.

Personal Tax

An interest free loan over £10,000 will be classed as Benefit-in-Kind. This needs to be included on your P11D and Class 1A National Insurance at 13.8% is payable by your limited company.

A Benefit-in-Kind is defined as benefits you receive from the company that aren’t included in your salary or wage. It could be a service you use personally but which the company pays for.

How this relates to Director’s Loans is detailed in our ‘Everything you need to know about Director’s Loan.’

Before taking a Director’s Loan, it’s advisable to seek professional advice from a qualified and experienced accountant.

Our Directors are extremely experienced in this area and are happy to discuss any points raised in this article in greater detail with you. Give them a call on 01962 867550 or send us a message via our website and we’ll be in touch to arrange a convenient time to speak.