Using BeanBalance to assist with managing your director’s loan
BeanBalance helps you to keep track of any money you borrow from your company, and any loan repayments you make.
There are two things to keep in mind when you owe your company money:
- Interest payable to your company
- Repayment of the loan
INTEREST ON DIRECTOR’S LOAN:
You must pay interest to your company at the HMRC official rate of 2.5% if and for as long as the total amount due to the company exceeds £10,000. This interest is income for your company on which it will pay corporation tax of 19%. The after-tax interest is then included in retained earnings, on which you can draw 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%, which can be reclaimed 9 months after the financial year in which the taxed loan was permanently repaid.
There are basically two ways a director’s loan can be repaid: (1) by declaring dividends against the director’s loan account OR (2) by making cash payments to the company.
Dividends are the preferred option, since cash payments are subject to the following restrictions, which disqualify them as loan repayments:
- The 30-day rule: A loan balance of more than £5,000 which has been repaid, but then within 30 days of repayment another loan of £5,000 or more was taken from the company – the repayment of the >£5k loan is disqualified.
- The intentions and arrangements rule: A loan balance of more than £15,000 which has been repaid (in full or partly), but at the time of the repayment the director had arranged to re-borrow 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.