{"id":5757,"date":"2024-05-28T10:21:51","date_gmt":"2024-05-28T10:21:51","guid":{"rendered":"https:\/\/www.bainesjewitt.co.uk\/blog\/?p=5757"},"modified":"2024-05-28T10:21:53","modified_gmt":"2024-05-28T10:21:53","slug":"directors-loans-a-missed-tax-planning-opportunity","status":"publish","type":"post","link":"https:\/\/www.bainesjewitt.co.uk\/blog\/directors-loans-a-missed-tax-planning-opportunity\/","title":{"rendered":"Director\u2019s loans \u2013 A missed tax planning opportunity?"},"content":{"rendered":"

A director\u2019s loan is a form of profit extraction from your company, often used alongside salaries, dividends and expenses.\u00a0<\/span>\u00a0<\/span><\/p>\n

Essentially, you borrow money from your own company that is not accounted for by one of the other profit extraction options.\u00a0<\/span>\u00a0<\/span><\/p>\n

Director\u2019s loans are a popular way of accessing capital tied up in your business without creating immediate personal tax liabilities \u2013 but you should still take the time to plan!<\/span>\u00a0<\/span><\/p>\n

Personal tax<\/span><\/b>\u00a0<\/span><\/p>\n

Income Tax\u00a0<\/span><\/b>\u00a0<\/span><\/p>\n

You don\u2019t normally pay Income Tax on director\u2019s loans as the tax liability sits with your business.\u00a0\u00a0<\/span>\u00a0<\/span><\/p>\n

However, the loan may be \u2018written off\u2019 or \u2018released\u2019, i.e. not repaid.\u00a0<\/span>\u00a0<\/span><\/p>\n

In this instance, you must report it via Income Tax Self Assessment (ITSA) and pay Income Tax on the loan.\u00a0\u00a0<\/span>\u00a0<\/span><\/p>\n

Your company must also deduct Class 1 National Insurance (NI) through its payroll.\u00a0\u00a0<\/span>\u00a0<\/span><\/p>\n

A note on benefits\u00a0<\/span><\/b>\u00a0<\/span><\/p>\n

A director\u2019s loan may be considered a type of benefit in kind (BIK), a benefit which an employee or director receives which is not included in their salary.\u00a0<\/span>\u00a0<\/span><\/p>\n

This can create additional personal tax liabilities.\u00a0<\/span>\u00a0<\/span><\/p>\n

For a loan of \u00a310,000 or more and free from interest, you will need to report it via ITSA and your company will need to deduct Class 1 NI via its payroll.\u00a0<\/span>\u00a0<\/span><\/p>\n

Business tax<\/span><\/b>\u00a0<\/span><\/p>\n

Corporation Tax\u00a0<\/span><\/b>\u00a0<\/span><\/p>\n

Director\u2019s loans can create a Corporation Tax liability if they are made to a director or shareholder of a close company, as dictated by Section 455 CTA 20100.<\/span>\u00a0<\/span><\/p>\n

This is a UK-resident company which is controlled by either:\u00a0<\/span>\u00a0<\/span><\/p>\n