If you run a limited company, you may have come across the term directors loan or directors loan account and wondered what it is, or even you could be looking at ways you can withdraw money from your limited company to cover an emergency bill or large purchase and heard about directors loans. No matter your reason for researching them, RJF Accounting will tell you everything you need to know about directors’ loans in this blog post.
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What Is a Director’s Loan?
A director’s loan can be one of two things. The first is when you withdraw money from the company that does not fall under any of the usual ways to do so, such as:
It is when money is withdrawn from the company that needs to be paid back. It can also be when the director loans the company money that it must pay back later. This can be when it is just forming and requires some startup capital or if cash flow is tight and the director loans the company money to cover costs etc.
Details of the director’s loans, both in and out, are held in the Directors Loan Account section of the accounts. If you use cloud-based accounting software such as FreeAgent or Xero – there will be a dedicated section for this. If your accountant or bookkeeper keeps manual accounts, they will have an area for this within their records.
How Much Can I Borrow in a Director’s Loan?
Legally there is no limit to how much a director’s loan can be for, but you need to keep in mind if it is sustainable for both yourself and the business. The only implication when it comes to amounts other than can you or the business afford the loan is that any loan amount from the business to the director above £10,000 or more will automatically be treated as a ‘benefit in kind and must be reported on your self-assessment tax return.
Is Interest Payable on a Director’s Loan?
Yes, and no. So it is down to the business if interest is charged on any loan taken from the business. If the interest charged is below the official rate, then the discount granted to the director may also be treated as a ‘benefit in kind’ by HMRC. Class 1 National Insurance (NI) contributions are also payable at a rate of 13.8 per cent on the total value of the loan.
How Soon Must I Repay a Director’s Loan?
A director’s loan must be repaid within nine months and one day of the company’s year-end, or you will face a heavy tax penalty. Any unpaid balance at that time will be subject to a 32.5 per cent corporation tax charge (known as S455 tax). However, you can claim this tax back once the loan is fully repaid.
Can I Lend Money to My Company?
If you have just founded your limited company, it finds itself unable to meet its financial commitments, or you want to inject some cash flow into the business, you can loan your business money. If you decide that your business will have to pay interest on the balance, this income must be declared as part of your SATR, and the business must report this as an expense. Any loan the company receives from you will not be subject to corporation tax.
Directors Loan QuickFire Facts
When dealing with directors’ loan accounts, keep the following snippets in mind, and you cannot go far wrong:
- Aim to borrow less than £10,000
- If you borrow £10,000 or more, you must report it on your self-assessment tax return, and the company must treat it as a benefit in kind.
- If you lend to your company, ensure that you and the company use the correct tax methods.
- Do not allow your Directors Loan Account to be overdrawn for extended periods.
- Take out director’s loans only when necessary (i.e. explore all other options first)
- Repay your director’s loan within nine months and one day of the company year-end if possible
- Wait at least 30 days between taking out different directors’ loans.
When To Speak To An Accountant
Directors’ loans can be challenging, and if the above information has not helped, it may be time to speak to an accountant. If you want to talk to an accountant, why not reach out to the RJF Accounting team today? We provide specialist accounting services that can be tailored to your needs, from bookkeeping to payroll and accounting! We also handle other aspects of your business, from raising finance to investor relations! Call the team today on 0161 5040629 or drop us an email at hello@rjf.uk.com to see if we can help you get your business finances. We are open Monday to Friday, 9 am – 5 pm!