Director's Loan from a Company
Key Takeaways
- A director can borrow money from, or lend money to their company.
- The director should pay back any money they owe the company within nine months of the year-end.
- If you owe the company money, the Directors Loan Account (DLA) will be 'Overdrawn' & the tax implications are more complex and potentially heavy.
- A director who lends the company money must pay income tax on any interest the company pay them on the loan.
- You should get tax advice from an accountant before taking out a directors loan.
Company directors often need financial fluidity between their personal accounts, and the company's. Lending money to, or borrowing money from your company is quite normal, but must be done correctly to protect you legally, financially, and to ensure both you and your company are tax compliant.
What is a director’s loan?
This is when a director (or a director's close family member) borrows money from the company, which is not a repayment of money they had previously loaned to the company, nor a:
- Salary;
- Dividend; or
- Expense repayment
It is also when a director (or a director's close family member) lends money to a company, usually to meet start up costs, or to ease cash flow through a difficult period. This makes the lender a creditor of the company.
In either case, the book-keeper should record all moneys borrowed from, or lent to a director in a 'Director's Loan Account' (DLA), as well as each repayment.
What happens if the company is liquidated?
If the company goes into liquidation, any outstanding money borrowed by directors will be called upon. Directors will have to repay the loan in full, immediately.
Director's loan from company
Director's loans from a company are usually used to cover one-off expenses and are paid off in the short term. They require a lot of admin, so shouldn't be taken out unless the company has capacity to absorb this extra cost. They also carry significant risk, especially regarding potential tax penalties for the company. Parachute Law Solicitors can recommend you an excellent tax advisor to consult before you make or take the loan.
The interest on a directors loan is set by the company. If the interest chosen is below the official rate, then the borrowing director will likely be liable for paying income tax on the difference - as HMRC will treat it as a 'benefit in kind'. The company may also have to deduct NI contributions on the full value of the loan.
When should I repay my Director's Loan?
You should repay the loan in full within nine months and one day of the company’s year-end, or the company will face heavy tax penalties.
If you repay the loan and take out another one within 30 days, HMRC will consider this to be a continuation of the same loan for corporation tax purposes. Even if you wait to take the loan out after 30 days have passed, this may be viewed as tax avoidance.
Tax liability on a Director's loan from company
The company will need to use form CT600A when preparing the tax return, unless the loan is written off or released. If the loan is not repaid within 9 months of the end of your Corporation Tax accounting period, or it is repaid but an alternate loan is taken out instead, then the company may be liable for Corporation Tax at up to 32.5% of the full loan amount. In some cases, it may be possible to reclaim the Corporation Tax, after the original loan is repaid in full, but not the interest.
If the loan is written off or released, or the loan is greater than £10,000, then the company must deduct NI on the full loan amount through payroll. The borrowing director must pay income tax on the loan through a self-assessment tax return.
Director's loan to company
Lending money to the company is much more straightforward. The company will pay interest on the loan, and the lending director will pay income tax on the interest, using a Self Assessment tax return.
Accounting for a Director's loan
A record must be kept of all moneys owed to the company by the director, and vice versa. Any outstanding debt in either direction, must be logged in your company's annual accounts. If the company owes money to the director, the DLA is 'In credit'. If the director owes money to the company, the account is 'Overdrawn'
If the director does not repay the overdrawn account within 9 months, the company may become liable for heavy corporation tax penalties.
Frequently Asked Questions
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