The thought of borrowing money from your own company can be daunting, what with all the rules and regulations that must be met to satisfy the powers that be - HMRC! If you’ve been considering whether or not to use a director’s loan, or if you just want more information about what it is, you’ve come to the right place. We’re going to take you through the ins and outs of a director’s loan so that you know where you stand with the entire process. Result!
To keep it short and sweet, HMRC states that a director’s loan is money taken from the company account. However, it has to be money that isn’t one of the following:
That means any money that’s taken from the corporate account outside of your contractual payments is classed as a director’s loan. For more information, have a look at the director’s loan information on the HMRC website.
Any money that’s taken from the company account must be recorded - we can’t stress this enough! It might seem like an inconvenience at the time, but it’s vital that you record all transactions using a Director’s Loan Account (DLA).
A DLA should be used to record all transactions between the director and the company. It’ll help you keep on top of what money has been paid, when it is due to be repaid, and any tax that you might owe. And, not to mention, it’ll keep HMRC happy!
We hate to be the bearer of bad news, but yes - a director’s loan can come with tax implications. The amount you owe depends on the amount of the loan, and whether it has been repaid in the time frames provided by HMRC.
If the loan hasn’t been repaid nine months after the company accounting period comes to an end, you’ll need to pay corporation tax. This will be 32.5% of the original loan - or 25% if the loan was made before 6 April 2016. After the loan has been repaid, you can reclaim the tax.
You’ll also need to check if you have extra tax responsibilities if one of the following applies to you:
If, however, you’ve repaid the loan in the time frame and don’t exceed the £10,000 limit, you won’t have to pay any tax at all - yay!
For the entire time you’re borrowing money from your company, you’re technically classed as ‘overdrawn’. HMRC says that if you remain overdrawn and don’t pay back the loan within nine months and one day of your company’s year end, they’ll start charging interest until you either:
Unfortunately, you’ve got no way of reclaiming any interest you’ve paid, so it’s pretty important that you don’t miss the deadline!
In a word - yes! If the company decides you no longer have to pay back the loan, the amount your borrowed counts towards your personal income instead. You won’t have to pay tax on the money - unless you’re a higher-rate taxpayer - but you’ll owe Class 1 National Insurance.
Even if the loan does get written off, HMRC still needs to know about it. So, make sure that you report it on your P11D form at the end of the tax year!
Unfortunately using a director’s loan isn’t a straightforward process, as much as we wish it was! If you’ve got any questions about the process or about accounting in general, Mazuma will be happy to assist - contact us today to see how we can help.