
A director’s loan is money taken out of a company by a director that is not a salary, dividend, expense reimbursement or money that has previously been lent to the company.
Money borrowed from a limited company is charged to a director’s loan account. The balance on this loan account represents a debt that is repayable to the company by the director.
If you have taken a director’s loan, here is what you need to watch out for:
- Section 455 tax charges – If loans are not repaid within nine months of the financial year-end, your company faces a tax charge of 33.75 per cent on the outstanding balance. This tax is repayable to the company nine months after the end of the accounting period in which the loan is repaid or written off.
- Personal tax implications – Unrepaid or waived loans may be treated as personal income, resulting in additional income tax and national insurance liabilities.
- Benefit in Kind (BIK) – Loans exceeding £10,000 which are offered at below-market interest rates will trigger taxation linked to the BIK. This means that the company must complete and submit a form P11D to HMRC and give a copy to the director.
- Administrative penalties – Failing to record or report loans accurately in your accounts or tax returns could result in fines and further investigation.
In addition to fines, consistently overdrawn accounts or mismanagement can tarnish your company’s financial credibility, especially if it draws additional HMRC scrutiny.
Remember, acting against the interests of your company may also constitute a breach of your fiduciary duties as a director.
If this is the case, the company is entitled to seek equitable compensation from any director whose breach of these duties results in a loss.
How to stay compliant
To stay compliant, you must maintain clear records and follow the rules associated with directors’ loans.
If you are unsure how to handle directors’ loans effectively, it is best to seek professional advice.
Need help managing your directors’ loans? Get in touch with our expert advisers.