How do Director’s Loans work?

HMRC classes a Director’s Loan to be “money that is taken from the company that isn’t either a salary, dividend or expense repayment, or money that you’ve previously paid into or loaned the company.”

A Director’s Loan can be useful if you’re cash-short or for some reason, you find yourself with a large number of expenses. You can, in fact, use a Director Loan for anything you like.

Our guide, ‘Everything you need to know about director’s loans’ explains in great detail the different aspects of Director’s Loans, but for this article, we’re focusing on who can take a Director’s Loan and how they can be withdrawn and repaid.

Process for taking a Director’s Loan

It may seem obvious, but to take a Director’s Loan, you must be a director of the company. A director is someone who manages the day-to-day activities, including operational, financial and administrative, of the company.

You need the approval of the company shareholders to take a Director’s Loan, particularly if it’s over £10,000.

If you’re a one-person company, as the shareholder and director, taking a Director’s Loan is straightforward. But you’re still required to record and sign off the Director’s Loan on the company’s board minutes and record it on your Director’s Loan Account (DLA).

A DLA is a record of transactions, asides salary and dividends, between the company and its directors.

How to take a Director’s Loan

The actual process of taking the loan is simple; you withdraw the money from the company’s bank account without declaring a salary or dividend.

A word of caution though: when withdrawing money from the account, ensure there’s enough left to cover any outgoings including tax liabilities.

How to repay a Director’s Loan?

Repaying the loan is just as simple as taking it. It can be repaid by transferring the money into the company’s bank account or by crediting your Director’s Loan Account with a salary or dividend payment.

A note on Bed & Breakfasting

It may be tempting to take a Director’s Loan immediately after repaying one, but we strongly advise against doing so.

This is because HMRC deems this a tax avoidance tactic, which is known as Bed & Breakfasting – a strange name we know!

In simple terms, Bed & Breakfasting is said to occur when a director repays the loan in full before their year-end to avoid penalties, to then immediately take another loan, with the intention of never repaying it.

To discourage this, HMRC has implemented a serious of measures, which are explained in our Everything you need to know about director’s loans’ guide.

In summary, a Director’s Loan can come in handy at times when you find yourself needing access to cash. However, you need to be clear on your responsibilities of repaying the loan and be aware of any tax liabilities that may apply if you fail to repay it within the deadline.

Never take a Director’s Loan without first speaking to an accountant who is knowledgeable in this area. With over 20 years of experience advising contractors on a variety of matters, including Director’s Loans, we can help you come to the right decision.