What is a company director loan? Company director loans may be money from the director to their limited company. Equally, the limited company may have loaned money to the director. We will consider both of these scenarios. Please note that tax on director loans will arise if it is not paid back to the limited company. It is important to note that directors are not shareholders. Shareholders are not limited to company directors. There may be times when a shareholder is a director of a limited company and vice versa. It is essential to distinguish between directors and shareholders of a limited company. A director receives a salary or wages to remunerate them for the work done, but a shareholder receives dividends. Someone that is both a director and a shareholder of a limited company can receive wages and dividends. We have written an article on extracting tax-efficient money from a limited company. Be sure to use our free online corporation tax calculator to see how much you need to pay to HMRC as a UK limited company owner. When do director loans need to be paid back? Tax on director loans A loan must be repaid within nine months and one day of the company’s year-end when the limited company provides a loan to a director. If not, you will face a heavy tax penalty. Tax on director loans arises because HMRC believes that the individual is getting a tax benefit. Any unpaid balance will be subject to a 32.5% corporation tax charge, called a Section 455 tax, or S455. An S445 tax charge can be reclaimed once the Director’s loan is fully repaid, but it can be a lengthy process. If you’ve taken more than nine months and one day to repay your Director’s loan and have been charged corporation tax on the unpaid amount, you can claim this tax back nine months after the accounting period in which you cleared the debt. This is a long time to wait, and our advice would be not to put yourself in this position. One way of avoiding this situation is to put off paying your company’s corporation tax until your Director’s loan is repaid. Your corporation tax payment deadline is nine months after the company’s financial; year-end, which can give you extra time to repay the loan. You must wait for a minimum of 30 days between repaying one Director’s loan and taking out another. Some Directors avoid corporation tax penalties of late repayment by paying off one director loan just before the nine-month deadline, only to take out a new one. HMRC calls this practice ‘bed and breakfasting‘ and considers it tax avoidance. Even sticking to the 30-day rule is not guaranteed to satisfy HMRC that tax avoidance isn’t occurring. It is also possible to take out a Director’s loan by mistake if paying yourself an illegal Dividend. As a company Director, you may choose to take most of your income in Dividends, as this can be more tax-efficient than a salary. Dividends can only be paid out of profits, so if your company has not made a profit, no Dividends can be paid. An illegal Dividend payment would be considered a Director’s loan and recorded in the DLA. It would then need to be repaid within the nine-month deadline to avoid penalties being charged by HMRC. Contact our tax accountants to find out more about the rules around the repayment of Director’s loans to prevent a tax charge from HMRC. How are company director loans taxed? You may have to pay tax on outstanding Director’s loans in your own limited company. Your company may also have to pay tax if you’re a shareholder and a Director. Your personal and company tax responsibilities depend on whether the DLA is overdrawn (you owe the company) or in credit (the company owes you). If you repay a Director’s loan in full within nine months and one day of the company’s year-end, you won’t owe any tax to HMRC. Any overdue payment of a Director’s loan means your company will pay additional corporation tax at 32.5% on the outstanding amount. This extra 32.5% is repayable to the company by HMRC when the loan is repaid to the company by the Director. Another consideration of an overdrawn DLA is that the company has to pay employers National Insurance contributions at 13.8% of any benefit in kind. This includes a Director’s loan. If you write off the DLA or leave it unpaid, you must pay personal tax on the loan through your Self-Assessment tax return. This will be at the Dividend higher rate threshold of 32.5%. If your company charges you interest below the official rate on an unpaid Director’s loan, this is recorded as company income and treated as a benefit in kind. You would report the interest on a Self-Assessment tax return. HMRC states that you may have to pay tax on the difference between the official rate and the rate you paid. It is also worth noting that HMRC will not repay corporation tax until nine months and one day after the end of the corporation tax accounting period when the loan was repaid, written off or released. This could significantly impact your company’s cash flow, so it is advisable to consider all options before taking a Director’s loan. It is advisable to repay the loan within nine months of the end of the year-end accounting period. Please speak with your property tax consultant as soon as you can. Please speak to one of our tax advisers to get the best advice on the taxation of the Director’s loans. Can I lend money to my company? Our limited company tax experts are often asked, “how much interest can I charge on a director’s loan?” Our reply is consistent. You may charge the limited company a commercial rate of interest. The commercial rate of interest may be determined by how much interest a bank would charge the limited company. Company directors should create a loan agreement that states – The length of the loan – The value of the loan – The interest rate of the loan provided Lending money to your company as a Director may be an option if you want to invest money into your company to fund ongoing activities or buy assets. Your company does not pay Corporation Tax on any money you lend it. If you charge interest on a loan, it counts as both a business expense for your company and personal income for you. That said, basic rate taxpayers, can earn £1,000 tax-free interest from their limited company. High rate taxpayers can earn £500 tax-free interest from their own limited company You must also report this income on a Self-Assessment tax return. Your company must pay you the interest less Income Tax at the basic rate of 20% and report and pay the Income Tax every quarter using Form CT61. Some of the tax paid via the CT61 may be claimed back on your self-assessment tax return if you are a basic rate taxpayer or a high rate taxpayer. This is because of the tax-free interest amounts mentioned above. Research carefully the rules when lending your company money. The interest that the director charges is a cost to the limited company. The limited company will get a corporation tax relief on the director loan interest charged. Writing off director loans If you write off a director loan, you will be deemed to have received a taxable income that will need to be represented on your self-assessment tax return. The amount written off is treated under Income Tax (Trading and Other Income) Act 2005 as a deemed dividend. Because it is a deemed dividend, there is no requirement for the company to have available profits for distribution. The dividend does not need to be paid to all shareholders of a particular class of shares. In addition, the company will also have to pay 13.8% national insurance on the loan value
