Directors Loans – What are they?
As a director, you may be in a position where you want/need to extract funds from the business. It is not dictated to you as to what you can use these funds on, but some of the more common reasons are for big purchases such as investing in another business or perhaps purchasing a home. These monies can be taken out of the company as salary or dividends, however this would need to be declared immediately. If it is not, then it will be treated as a ‘Director’s loan’.
Important points to consider:
- Withdrawing more than £10,000
If the loan amounts to more than £10,000 overall then it will be classed as a benefit in kind. This is simply because you are, in essence, receiving an interest free loan. Therefore, you must declare it on your personal tax return and unfortunately you will have to pay income tax to equal to HMRC’s notional interest rate
- Are there any ways to avoid paying income tax on the ‘Directors Loan’?
Yes possibly, if the directors loan is less than £5,000 or you are using it to invest in another business then you may be exempt from taxes. We’d advise chatting to your accountant about what your plans are first though so that you don’t get any nasty surprises!
- Do you still owe the company money at company year-end?
If you still owe some of the loan back come the end of the tax year, this can cause the company cash flow problems if it isn’t budgeted for. Dividends are paid after tax, therefore, if you don’t have enough profit left over in the business after paying tax to fully clear the directors loan account with dividends, you will have a problem. You will have to declare this on your corporation tax return and you may have to pay some additional tax.
- Will HMRC help me out with this?
If you are able to pay back the overdrawn amount within 9 months and 1 day of your accounting year end, then there will be no extra tax to pay. However, please remember that you still need to declare the loan on the corporation tax return, but you will receive tax relief on the amount. But of course, If you have not paid back the loan within 9 months and 1 day of the accounting year end, then you will have to pay tax on the loan amount. The good news is, you can claim the director’s loan tax back once the loan is finally repaid but not until 9 months after the end of the financial year in which the loan was paid off (again causing cash flow problems if you are not prepared)
- We have to be sensible about this though.
As tempting as it might seem to be pay back the loan to simply take it straight back out again, HMRC have now got wise to this concept. They have even labelled it ‘bed and breakfasting’. Therefore, they have placed a clause into the rules. If the amount repaid is then re-taken out within 30 days then this counts as if the loan has not been repaid.
This can sound a little complex, therefore if you have any questions on this then please contact us and we will be more than happy to help!
Thanks and best wishes