With the cost of living increasing, it may be tempting to take more money out of your company, and it’s important to understand the implications. Whether you’re planning to borrow money from your Limited company, or you’ve unintentionally drawn a little extra, if director’s loans are handled incorrectly, they can cost you dearly in extra tax. In this article we’ll explain what you need to know so you can avoid walking into this trap.
What is a director’s loan?
Any money that you take out of your Limited company that is not either salary, dividend or expenses payment, must be recorded in your Director’s Loan Account (DLA). This includes loans to a spouse or family member.
At the end of your company’s financial year, you will either owe the company money, or the company will owe you. This should be recorded as an asset or a liability in your company accounts.
Director’s loans can be a useful way to cover unexpected expenses, or bridge a gap temporarily until funds are available to pay a dividend. It’s important to remember that this money has not been subject to personal or company tax, and this will need to be corrected.
Records that you must keep
Your company is a separate legal entity, and any transactions between your company and yourself must be recorded.
Make sure you record any cash withdrawals from the company, and any personal expenses that were paid with company money. This does not include allowable business expenses.
HMRC will keep a close eye on your DLA, so it’s important that all transactions involving your personal finances and the company’s are recorded, and that your records stand up to scrutiny.
Additional tax on your director’s loan
If you owe your company money at the year-end, you have 9 months and 1 day to pay back the loan. If you pay the whole loan back in this time, you will not owe any additional tax.
If you miss this deadline you will need to pay additional corporation tax at 32.5% on the outstanding amount. This amount will be repayable by HMRC when you’ve repaid the loan to the company.
There may be personal tax at 32.5% if you don’t pay back your director’s loan. This amount will not be refunded.
Benefit in kind charges
If you owe your company more than £10,000 (interest free) at any given time, this will be classed as a benefit in kind and additional personal tax will be due. The value of benefit in kind is calculated using HMRC’s official interest rate.
You will have to pay personal tax on the value of the benefit in kind, and your company will have to pay class 1 National Insurance at 13.8%.
If you pay interest on the loan at the official rate or above, no benefit in kind will be incurred. Any interest you pay must be recorded as income for your company, and company taxes may be due.
If your company owes you money
Your company doesn’t have to pay Corporation Tax on money that you personally lend it, and you can withdraw the full amount at any time with no tax implications.
If you charge the company interest this counts as a business expense for the company, and personal income for you. You must declare this income on your Self-Assessment tax return.
Paying off your director’s loan
Your DLA will usually be repaid either by declaring a dividend, using expenses repayments that your company owes you, or by bank transfer into the company bank account.
Bed and breakfasting
The bed and breakfasting rules exist to prevent company directors temporarily repaying a DLA to avoid paying additional tax, and then taking it out again shortly after.
When a loan in excess of £10,000 is repaid by the director, no further loan over this amount can be withdrawn within 30 days or the full amount will automatically be taxed. If the loan is in excess of £15,000, the B&B rules may still apply even outside the 30-day period.
We recommend that you talk the situation over with your accountant if you believe these rules may apply.
If you have any questions or if we can help in any way, please contact our expert team on 01296 468 483 or email info@orangegene.com.