A director’s loan is when you take money from your company that isn’t a salary, dividend or expense repayment and you’ve taken more than you’ve put in. You and your company may have to pay tax on the loan.
You must keep a record of any money you borrow from or pay into the company – this record is usually known as a ‘director’s loan account’.
There are two things to keep in mind when borrowing money from your company:
- Interest payable to your company.
- Repayment of the loan.
INTEREST ON DIRECTOR’S LOAN:
If at any point the total amount due to the company exceeds £10,000 (was £5k before 6 Apr ’14) you have to pay interest on the loan to your company at 3% on loans made after 5 Apr ’15 (was 3.25% before 6 Apr ’15 and 4% before 6 Apr ’14). This interest is income for your company on which it will pay corporation tax of 19% (20% up to 31 Mar ’17). The after-tax interest forms part of your retained earnings which you can draw again as dividends.
REPAYMENT OF DIRECTOR’S LOAN:
Any amount due to the company as at the company’s year-end has to be repaid to the company within 9 months after its year-end date. Any amount not repaid within this period is subject to a temporary tax charge of 32.5%, for loans made on/after 6 Apr ’16 (was 25% for loans made before 6 Apr ’16).
There are basically two ways in which a director’s loan can be repaid, i.e. by declaring dividends and allocating it against the loan account or by transferring the funds into the company.
The first option is the best, since with the second the HMRC has imposed the following anti-avoidance rules (in which case the money transferred back to the company will not count as a repayment of the old loan):
- The 30-day rule: Where a director repays £5,000 or more of the money they’ve borrowed from the company and within 30 days of this reborrows more than £5,000.
- The intentions and arrangements rule: Where the amount owed by a director is £15,000 or more, a full or part repayment of this is made and at the time the director had arranged to reborrow the money from the company or had the intention to do so. An example of an arrangement would be if a bank loan was taken to repay the director’s loan; and afterwards a director’s loan is taken to repay the bank loan.
Please see this HMRC link for more information.