What You Need to Know About a Director’s Loan?
It can be a tricky job as a company director. You are entrusted with many responsibilities, and it is only a matter of time before your decisions and answers have to be discussed. For instance, should you loan money to your company? Or should you borrow money from the company with a director’s loan? When it comes to the latter, you first need to understand the exact meaning and risks behind a director’s loan, as it is strictly regulated and should only be used for short-term borrowing. So, let’s go through some information about what a director’s loan involves.
What is a Director’s Loan?
When it comes to the director’s loan there are two types: when a director lends money to the company, usually to help with start-up costs and support any cash-flow difficulties. And where the director (or close family member) borrows money from the company that does not include salary, dividends, expense repayment, or money previously paid or loaned into the company. This is known as a director’s loan, and like any loan, you will eventually have to pay off what you borrowed.
What is the Directors Loan Account (DLA)
You must keep a director’s loan account or DLA, which is a record of all the money that has either been borrowed or paid into the company. When HMRC needs to see your annual accounts at the end of your company’s financial year, the DLA needs to be included on the balance sheet. This will then show whether the company is owed money from the director (asset) or the company owes money to the director (liability).
Within your DLA you should include:
- Cash withdrawals and repayments made by the director
- Personal expenses that are paid using company money or credit card
- Business transactions paid or received by the director
- Any interest changed on the director’s loan
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Why Should I Take Out a Director’s Loan?
Taking out a director’s loan rather than a loan from a bank can come with many benefits. For instance, a director’s loan will give you access to more money than you are currently receiving from dividends and/or salary. It is flexible and fast to cover short-term and one-off expenses such as unexpected bills. However, it should be considered carefully and only as a last resort for short-term borrowing, due to being admin-heavy and the potential of hefty tax penalties.
How Do I Take Out a Director’s Loan?
Taking out a director’s loan can be a little tricky and is not as straightforward as some may think. First of all, some loans will need to get approval from company shareholders, especially if you are looking at a loan over £10,000. However, there are some circumstances where you will not need shareholder approval, for instance:
- The series of loans is less than £10,000
- The loan is less than £50,000 and is intended for expenditure on company business
- To fund the defence of civil or criminal proceedings brought in connection with the company
What is the Interest?
When it comes to interest, it is up to your company what is charged on the director’s loan. Keep in mind, if the interest is below the official rate then it may be treated as a ‘Benefit in Kind’ by HMRC. This can sometimes be referred to as ‘perks’, and as a director you may be taxed on the difference between the official rate and what you are paying. HMRC will see a director loan to be a Benefit in Kind if:
- The loan exceeds £10,000 at any time
- You’re not paying interest
- The interest paid is below HMRC’s average beneficial loan rate
If any of these points are relevant to you, then you will be required to include it on a P11D. HMRC pays close attention to accounts that are regularly overdrawn, and if they believe your loan is a salary, Income Tax and National Insurance will be charged.
How Much Can I Borrow?
Whilst there is no legal limit to how much you can borrow, you should take a lot into consideration. For instance, how long can the company manage without this money? How much can the company afford to give you? What are the tax rules? You don’t want to be responsible for your company tackling cash flow problems, and depending on how much you have borrowed will result in different tax rules. For example, if the amount is under £10,000 then it can be borrowed tax-free, but it needs to be repaid within nine months and one day from the date of the company’s financial year end. It starts to get more complicated if this payment is missed, or the amount loaned is higher. In fact, before considering the amount to borrow there are a few extra details you may need to know here.
When Do I Need to Pay Back a Director’s Loan?
As having said previously, a director’s loan has to be paid back within nine months and one day following the company’s financial year end. If unpaid, you could be subject to a 33.75% corporation tax charge (S455 tax). This can eventually be claimed back, however it is an extremely lengthy process. In total there are three ways you can pay back a directors loan:
- Declare a dividend to the director but don’t pay it
- Process a salary to the director but don’t pay it
- Pay cash into the company
Is it Possible to Take Out Another Directors Loan if it Has Been Paid Back?
To take out another loan, you have to wait a minimum of 30 days if you have already paid back the previous. Keep in mind however, it can be seen as bad practice by HMRC if you are paying off one loan just before the nine month deadline, only to take out a new one a month after. This can be considered tax avoidance or ‘Bed and Breakfasting’. So try to not rely on the director’s loans. The rules regarding ‘Bed and Breakfasting’ can be very complex, so we strongly advise having a chat through these rules. If you are looking for more information, then get in contact with one of our friendly team members, who will happily talk you through all you need to know.
What if I Can’t Repay?
Sometimes, we get into an unfortunate situation where you find you do not have the funds to repay the loan within those nine months. Ideally, you will have enough money in the company’s profit reserve
to clear the loan, by taking a dividend equivalent to the loan amount. However, in some cases the company can end up in liquidation, and in extreme cases court or personal bankruptcy.
Overall, this is just a quick summary of what is involved within a director’s loan. To find out more information, get in contact with one of our reliable online accountants who will be able to tell you all about a director’s loan, including the risks and benefits it can provide you.About Us Our Prices Instant Quote