If you have a limited company, a director’s loan is something that might crop up – either you as a director may wish to loan money to the company, or you could borrow from the company.
Either way it is important to know what it is, how you should process it and what guidelines you should follow. Here we cover 7 things to know about Director’s loans…
What is a Director’s loan and why might I borrow from my company?
By definition a director’s loan is money you take from your company’s accounts that isn’t classed as expenses, dividends or salary. Essentially, it is money you will have to eventually repay!
There is also a director’s loan which is when a Director lends money to the company in the case of things like start up costs or cash flow.
Director’s loans normally are used as short term or one off expenses, and can give you access to money that you may not otherwise have access to. However they can be complicated and come with a fair amount of admin and tax implications, so it is best to be well prepared before you decide to go through with one – remember the money still belongs to the company, so HRMC are going to want to know what is happening!
How much can I borrow?
There is no legal limit on the amount that you can borrow.
That being said, there are two things that you need to bear in mind:
- Be careful that the amount that you borrow is not more than the company can afford. If your company cannot last for very long without this money you will impact its cash flow.
- Any loan over the threshold of £10,000 is automatically treated as a ‘benefit in kind’. It will have to be reported on your self-assessment tax return, and will be subject to being taxed at the official rate of interest.
If your loan is over £10,000 you will also have to seek shareholders’ approval before you can proceed.
How long do I have before I have to repay the loan?
You must repay a director’s loan within nine months and 1 day of the company’s year-end, or you will pay a tax penalty.
Any unpaid balance at this time will be subjected to a 32.5% corporation tax charge.
It is best to avoid this situation, however if it is unavoidable you can either claim this back after the loan is fully paid (although it is a rather long process!) or delay paying your corporation tax, as the deadline for this is nine months after your financial year end which gives you more time to repay the monies owed.
Noe that you cannot simply pay back one load and take out another immediately after, as HMRC considers this to be tax avoidance. Th minimum time you should wait is 30 days, but this is not guaranteed to satisfy HMRC, so it is best to avoid entirely!
What if the company owes me money?
If you have decided to lend money to your company to invest, fund ongoing activities etc to move things forward on a temporary basis the company doesn’t pay any Corporation Tax on this. The money that you have lent personally to the business can be withdrawn at any time.
If you charge interest on the loan, it will be classed as a business expense to the company and personal income to yourself. The interest amount would simply have to be declared on your self-assessment.
Should I make a record of director’s loans?
The simple answer is yes!
If you are in the position of being the only director of a limited company it is important that you distinguish between you and the founder, you as an employee and the legal entity that is the company you created.
Your company has statutory obligations and as a director you also have statutory duties and responsibilities to the company. Therefore everything must be recorded in your company accounts.
If your company is larger and has several directors, then as well as your accounts decisions regarding loans should also be recorded as part of the meetings and minutes.
Can I take out a director’s loan by mistake?
Funnily enough yes you can, if you pay yourself an illegal dividend. As a director you may choose to take a larger portion of your income in dividends, as it is often a more tax efficient solution than a regular salary.
However, dividends can only be paid out of profit. If your company has not made a profit then legally no dividends can be paid out. Take care in filing your accounts so that you do not report a profit by mistake and end up with an illegal dividend as it will be considered to be a director’s loan and you will have to repay it!
Final checklist.
Last but not least, if you are considering either borrowing money from your company or lending money to it, make sure you review the items above, or use our handy checklist.
Read our blog ‘Who can be a company director?’
Read our blog ‘6 things to do when appointing a new director’
Check out our Academy Training on Director Duties.