A pitstop guide to Director’s Loans for Contractors
The more experience you gain as a contractor, the more familiar you become with accountancy terms, such as dividends, payroll, VAT, Corporation Tax and, last but not least, Director’s Loan.
But as is often the case when it comes to accounting jargon, understanding exactly what a Director’s Loan is, why you might need one and their tax implications can get confusing – even in this day and age, some accountants have a habit of making things more complicated than they need to be.
In this article, we’ll explain what a Director’s Loan is and focus on several key points relating to them.
What is a Director’s Loan?
A Director’s Loan is money taken from your company that isn’t salary, a dividend, an expense repayment or capital that you’ve previously paid into or loaned your business. Think of it as money loaned for other purposes.
Under a Director’s Loan, you can even lend money from your own pocket to your company, whether to help with cash flow or finance an investment. In this scenario, you become a creditor of your business.
When might you draw a Director’s Loan?
Whenever you like – to help with buying a house, paying off a credit card or treating yourself to a holiday. What matters is that you keep track of any money taken this way via a Director’s Loan Account (DLA). In this account, which your contractor accountant can easily help organise for you, all capital loaned and expenses that you’ve paid for personally should be recorded.
How are Director’s Loans taxed?
It depends if your DLA account is in the red at the end of the year. If, say, you took £1,000 as a Director’s Loan but repay it within nine months and one day of your company’s year end, you’ve nothing to worry about from a tax perspective.
If your DLA remains overdrawn past this point, your company will be subject to s455 (a holding tax) payable at 32.5% on the value of the loan. It’s important to note, unlike most other taxes, section 455 is essentially a temporary tax. It’s repayable once the outstanding loan balance is repaid. However, the repayment is not immediate – as with payment of the tax, the important date is the regular due date for Corporation Tax. Consequently, the tax becomes repayable nine months and one day after the end of the accounting period in which the loan is repaid.
In the event that you’ve lent your company money (rather than borrowed it from your business) Corporation Tax won’t apply. Directors can choose to charge interest on this loan too, in the way that most other forms of finance do. Although, as owner-directors of their own companies, contractors tend not to.
Is there a maximum I can take?
No, but anything over £10,000 is considered a Benefit in Kind (BiK) – in other words a personal benefit you have received from your company. You’ll therefore be expected to pay BiK tax, Class 1 National Insurance (13.8%) and declare the loan on your self-assessment tax return. The loan might also be subject to tax at the official rate of interest.
Can Director’s Loans be ‘written off’?
Yes. You can loan yourself money from your company and write it off, meaning you don’t have to pay it back. However, it will be classed as personal income and treated under Income Tax as a dividend.
As you might have gathered, Director’s Loans – whilst serving an important purpose – can get complicated quite quickly. It therefore goes without saying that speaking to a specialist is advised.
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