What is a director’s loan?

What is a director’s loan?

A director’s loan is money that’s borrowed from your company by either you or close family members, that’s not a salary, dividend, expense repayment, or money that you have previously paid into or loaned the company.

Examples of why you may need to borrow from your company is if you need to pay out for an unexpected bill, or have other financial issues and need tiding over for a certain amount of time.

What are the rules for taking out a director’s loan?

There are strict rules surrounding this procedure; it is not as simple as just taking money out and then popping it back in whenever you like.

It’s a legal requirement to keep a ‘director’s loan account’ record of any money that is either borrowed or paid into the company, and at the end of the financial year you’ll need to include this information on the balance sheet of your annual accounts.

There may also be tax implications for taking money out of the company – this will all depend on how the loan is settled.

If the loan is paid back within nine months of the end of your Corporation Tax accounting period, then:

• You’ll pay Corporation Tax at 33.75% of the original loan (or 32.5% if the loan was made before the 6th of April 2022).
• After repaying the loan, you can reclaim Corporation Tax (but not interest).

If the loan is not paid back within nine months of the end of your Corporation Tax accounting period, then:

• You’ll pay Corporation Tax at 33.75% of the original loan (or 32.5% if the loan was made before the 6th of April 2022).
• Interest on the Corporation Tax will be added until either the Corporation Tax is paid, or the loan is repaid.
• After repaying the loan, you can reclaim Corporation Tax (but not interest).

A ‘written off’ loan
A loan that is ‘written off’ will be subject to Class 1 National Insurance through the company’s payroll and you’ll need to pay Income Tax via self-assessment.

In this situation, your company can also reclaim the Corporation it pays on a director’s loan, but you can’t reclaim any interest.

A loan that exceeds £10,000
A shareholder or director who owes the company more than £10,000 will need to treat the loan as a Benefit in Kind and deduct Class 1 National Insurance.

This will need to be reported on a personal self-assessment tax return which may be subject to tax at the official rate of interest.

Can I lend money to my company?

Yes, it is possible to lend money to your company, however, your company will not be subject to Corporation Tax on this loan.

If you charge your company interest then the company will need to pay you the interest less Income Tax at the basic rate of 20%, plus report and pay the Income Tax every quarter using a CT61 form.

It’s important to be aware that this interest counts as a business expense for your company as well as personal income for you, which means you must declare it on your tax return.

If you need more information on how self-assessment works, read our What is a Self-Assessment Tax Return? page.

Our team of experts are available to answer any queries you may have, so drop us a line on 01442 795 100, email jaime.thorpe@dolanaccountancy.com, or contact us via live chat.