What is a director's loan and how do they work?
Any money taken out of a company by a director, where it is not paid out as salary, dividends or expenses, constitutes a director's loan.
Loans over £10,000 should generally be approved by the shareholders.
Records must be kept for any money borrowed from (or lent to) a company - this is known as a 'director's loan account'. At the end of the financial year, any money owed to the company (or vice versa) must be included in the balance sheet as part of the annual accounts.
Tax may need to be paid on a director's loan. This depends on whether the director’s loan account is overdrawn (you owe the company) or in credit (the company owes you).
If you owe the company money you or your company may have to pay tax if you take a director’s loan. You may have extra tax responsibilities if:
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the loan was more than £10,000
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you paid your company interest on the loan below the official rate
If you lend your company money, the company will not pay corporation tax on the money you lent it. Any interest you charge your company on a loan counts as both a business expense for your company and personal income for you. You would need to report this income on your personal self-assessment tax return.
Your company must pay you the interest less income tax (at the basic rate of 20%) and report and pay the income tax every quarter using a CT61 form.
How do director's loans differ from dividends or salary?
A director who draws a salary must do this in the same way as if they are paying any other employee. Wage payments should be registered with HMRC and deductions should be made through PAYE for income tax and National Insurance contributions.
Dividends can be paid to director shareholders in line with the extent of any annual profits. Dividends are taxed differently from salary payments.
A director's loan is not considered to be a payment in the same way as salary or dividends and tax may not need to be paid depending on the arrangements. However, it is vital that accurate records are kept, as director's loans are subject to their own tax rules.
When is a loan classed as a benefit in kind?
If a director makes personal use of any asset belonging to the business, this is known as 'a benefit in kind' and must be declared for purposes of tax.
If a director's loan account exceeds £10,000 at any time, this will be considered as a benefit in kind. It must be reported on the director's self-assessment tax return and will be liable for Class 1 National Insurance deductions and the relevant rates of personal tax.
What is 'bed and breakfasting'?
Corporation tax must generally be paid on director's loans. However, if the loan is repaid within 9 months at the end of the relevant corporation tax accounting period, tax relief can be obtained which essentially means there is no corporation tax to pay.
If a director's loan is repaid within the 9 month period but is immediately taken out again (ie in order to purposefully avoid paying corporation tax) this is known as ‘bed and breakfasting'. In an effort to stop this practice, HMRC has brought in rules which mean that any director's loans over £5,000 which are repaid and then taken out again within 30 days will not be eligible for tax relief.
