It is not uncommon for directors of a limited company to withdraw money from the company that isn’t a salary, dividend or expense reimbursement. This is considered a director’s loan.
However, you must keep records of these withdrawals, along with loans made by a director to the company, in a director’s loan account (DLA).
A DLA is crucial for establishing your personal and company tax obligations.
There is no legal limit on how much you can borrow, but if you withdraw more than £10,000 from your company, then you will need to consider whether a benefit in kind needs to be reported to HMRC.
Here are three easy ways to manage your director’s loan account:
Interest on loans
Your company has the freedom to set the interest rate on any loan it provides to a director.
That said, if the interest is set below HMRC’s official rate, the difference will be a taxable benefit.
In other words, the director will face a personal tax charge based on the difference between the interest paid and the interest calculated using the official rate set by HMRC.
It is worth noting that HMRC’s official interest rate is not fixed. It fluctuates in response to changes in the Bank of England base rate.
Avoid being overdrawn at the financial year-end
Being overdrawn on a DLA can carry a number of significant tax implications.
If a director of a close company (i.e. a company with five or fewer participators) is in debit nine months and one day after its year end, a tax charge under Section 455 CTA 2010 (S455 tax) will apply at a rate of 33.75 per cent. This tax charge is payable by the company.
Once paid, S455 tax is repayable to the company nine months after the end of the accounting period in which the loan is repaid.
However, the time between paying the loan and receiving a tax refund could negatively affect your company’s cash flow, so it is best to avoid being overdrawn at the financial-year end.. Alternatively, consideration could be given to a dividend being documented within nine months of the company’s year end to repay the loan. This will prevent the charge arising.
Reduce Corporation Tax on company loans
Corporation Tax is not liable on money you lend to your company.
If you charge interest on a loan to the company, this will count as both personal income for you and a business expense for the company.
You must report your income on a Self-Assessment tax return, while the company must deduct Income Tax from the interest at the basic rate of 20 per cent and pay it across to HMRC each quarter using form CT61.
Contact us today for further advice on managing your director’s loan account.
