There may be a time where you need to take out funds from your limited company that are not allocated as a salary, dividend or reimbursement of expenses. If this is the case then this is usually allocated as a directors loan.
1. What is a directors loan account?
Although the money in your limited company account technically it is the company's money and not you as the individual.
Essentially, HMRC defines a director’s loan as money taken from your company that isn’t either:
- A salary, dividend or expense repayment
- Money you’ve previously paid into or loaned the company.
So if you take money out for any other reason, the amount must be recorded in your personal DLA (director’s loan account). At the end of your company’s financial year, depending on your activity, you’ll either owe the company money or the company will owe you money.
This should be recorded as an asset or a liability in the balance sheet of your company’s annual accounts.
2. Why would you want to draw a directors loan?
There are many reasons why you might need to take a loan from your company, for example unexpected bills 📑, house renovations🏡, or even paying for a holiday. 🏖
The important thing to remember is that the loan hasn’t been subject to either personal or company tax and there are associated implications with taking this from the Limited company.
3. What are the tax implications of a directors loan?
If you have a director’s loan at the date of your company’s year end, you may need to pay additional tax.
If you pay back the entire directors loan within nine months and one day of the company’s year end, you will not owe any tax.
Any overdue payment of a director’s loan means your company will have to pay an additional tax called S455 tax which is charged at 32.5% on the outstanding director’s loan.
The good news is that the S455 tax can be reclaimed once the loan has been repaid. The bad news is that the repayment cannot be claimed until nine months and one day after the end of the company year end in which the director’s loan was repaid.
4. What if i have a directors loan?
A tax charge may arise under the benefits in kind legislation where a director has a company loan. The charge will arise if the interest paid on the loan is less than the interest that would be payable at the 'official rate’ set by HMRC. For 2020/21 official rate has been set at 2.25%.
There is an exemption for small loans and as long as the outstanding loan balance does not exceed £10,000 at any point during the tax year, there is no benefit in kind charge.
However, if the loan balance is more than £10,000 during the tax year, even if only for one day, a tax charge arises based on the difference between the interest that would be payable at the official rate and the interest actually paid.
So the best method may be to pay interest to your limited company if you draw a loan above £10,000.
Where a tax charge arises, Class 1A NICs are payable by the company (reportable on the P11D).
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