Are director's loan repayments taxable?
Director’s loans can be a tricky area legally. If you’re thinking about taking one, you need to know the facts. Learn them in this guide.
What is a director’s loan?
A director’s loan is when you borrow money from your company or lend it money as its director. This type of transaction isn’t classed as a salary, dividend or expense. In essence, it’s a loan that you’ll have to repay.
Generally, this isn’t something you should do and definitely not on a regular basis. However, it can help with start-up costs for a new business or inject money from your own funds to stay solvent during a difficult cashflow period.
When you borrow from or lend to your company, it’s usually because you’re trying to satisfy the demands of a short-term or one-off problem.
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What is a director’s loan account?
As a company director, you should have a director’s loan account (DLA). This is an account dedicated to any spending you do with company money or loans you borrow from it.
Your DLA can become overdrawn if you borrow more money than you are lending it. Shareholders and other creditors don’t like it if you’re overdrawn for too long. Try to keep your loan account in credit (lending more than you are borrowing) or at zero.
At the end of your financial year, you will either owe your company money (an asset) or it will owe you (a liability). Your company’s accounts need to show all the money going in and out of your accounts and that includes your DLA.
How much can you borrow?
There’s technically no limit to how much you can borrow but that doesn’t come without its considerations.
How will your business fare in the meantime? It’s possible your company’s cashflow might suffer and it might not have enough to sustain itself until it has been repaid.
If you’re struggling to make financial decisions about your business, our bean counters are here to help you.
Any loan above £10,000 needs to be approved by your shareholders before it can be legally taken. In addition to this, loans of this amount or more are automatically considered benefits in kind. You’ll need to report it in a self-assessment tax return.
Our superheroes will make sure you’re always compliant with HMRC’s regulations so you don’t get shocked with a nasty fine.
How do director’s loan repayments work?
The money you’ve loaned to yourself still belongs to your company and not you. Even following insolvency, you’re still expected to repay it.
A director’s loan can be offset by declaring the money as a dividend on your company’s end-of-year accounts, assuming sufficient funds are available.
Depending on how much you borrow and for how long, it may become eligible to be taxed. You need to keep good bookkeeping habits to keep track of this so you can lawfully pay any due tax.
All director’s loans are expected to be paid back 9 months from your company’s year-end date. An unpaid balance is subject to 32.5% corporation tax - also called S455 tax.
You can claim the tax back when the sum has been repaid but you’ll have to wait 9 months after the debt has been settled. It’s best to avoid this situation altogether.
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Do director’s loans have interest?
It’s up to your company to decide any interest rates but if it’s below the official HMRC rate, it could be considered by the Revenue & Customs to be a benefit in kind rather than a loan.
The current official rate of interest is 2% for the 2022/23 period.
If your loan is considered a benefit in kind, this will bring with it all the laws and regulations permissible for this type of payment. You’ll need to declare it on a self-assessment tax return and you will be charged Class 1 National Insurance (13.8%) on the full value.
Can you take out a second loan after you’ve repaid the first?
You’re not allowed to take another loan out in the same 30 days you settled your last one.
Taking regular or routine loans can raise red flags with HMRC and they might consider it tax avoidance under certain circumstances.
Another illegal director’s loan practice is through illegal dividends. You might take a dividend to be tax-efficient but if your company doesn’t have enough profits for you to legally take one then this illegal dividend will be considered a director’s loan.
Is lending to your company also considered a director’s loan?
Borrowing money from your company is a director’s loan but so is lending to it.
For example, if you want to invest in your business by either permanently funding its activities or temporarily by purchasing assets.
When your company repays, it’s considered a business expense. They won’t pay corporation tax on the loan but a 20% income tax will be deducted at the source.
You can choose to charge interest on your loan but when the company repays it’s considered income. You have to declare this on a self-assessment form.
Finance Box will help you submit all your paperwork accurately and in good time so you don’t get penalised or fined.
Is taking a director’s loan the right thing for you to do?
Loan money is never easy money and there are drawbacks that you need to be cautious of before taking a director’s loan. Are you prepared for all the paperwork and cashflow consequences that come with it?
If you’re worried about taking a director’s loan and you’re unsure how it could affect your business, our accountants can shine some much-needed light on the situation to make it easier for you to decide.