The official government definition of a director’s loan is as follows:
‘A director’s loan is when you (or other close family members) get money from your company that is not:
- a salary, dividend or expense repayment
- money you’ve previously paid into or loaned the company’
That seems pretty straightforward.
There’s a legal requirement for you to keep a record of any money you either borrow from or pay into the company, and this record is what is known as the ‘director’s loan account’. Money owed by or to the company is recorded on the balance sheet.
Just like a bank account, the director’s loan account can either be in credit or overdrawn, and the status of the account has implications for both your personal and the company’s tax responsibilities.
If you take money out of the company as a director’s loan HMRC expects you to pay interest on it at their ‘official rate’. Current and historic rates are available online, or if you’re unsure, give our team a call on 0191 374 0300, we’ll be happy to help.
From a personal point of view, if you pay less than the official rate of interest, the interest discount will be taxed on you as a ‘benefit in kind’ and included on your Self Assessment tax return.
On the company side, there will be a Class 1A national insurance charge on any benefit in kind calculated above.
Additionally, if the loan is still outstanding 9 months after your year end, corporation tax is due on a loan at a rate of 32.5% of the outstanding balance.
It’s necessary to look into this for the particular circumstances of your director’s loan as factors such as the amount of the loan and when it is repaid have an impact on the tax liability. When the loan is cleared, either by being repaid or written off, it might be possible to reclaim the Corporation Tax paid.
If the company owes you money
We mentioned above that, like a bank account, the director’s loan account can either be in credit or overdrawn, so what happens if you put funds into the company, meaning it owes you money?
As with any loan, you can charge interest if you like. That interest is a business expense for the company and personal income for you. The company will pay you the interest less Income Tax at the basic rate, and notify HMRC using form CT61.
There’s no Corporation Tax due on any money you lend the company.
It’s both easy and complex
The rules for director’s loan accounts are relatively straightforward, but things can get confusing due to the range of possibilities affecting director’s loans. Things like when a loan was taken out, how much it was for and when/how it was settled all have tax implications for both companies and directors.
Having up-to-date numbers at your fingertips is essential. Cloud accounting makes keeping your numbers up to date easy and will avoid any nasty surprises with an overdrawn DLA.
Keep things separate
Things get additionally complicated when personal expenses and business expenses get mixed up. Our advice to small business owners would be to always manage your personal expenses and business expenses independently.
We can help
If you’re looking for help and advice regarding getting organised with expenses and bringing your director’s loan account under control, give us a call. We can help you avoid nasty tax shocks at year-end. Call now on 0191 374 0300.