A Director‘s Loan is when you take money from your business that isn’t a salary, dividend or expense repayment and you’ve taken more than you’ve put in.
You must keep a record of any money you borrow from or pay into the Company and this record is usually known as a “director’s loan account”. Amounts due to the director from the company should be recorded in the company’s books as a creditor while the amounts due from the director to the company should be recorded as a debtor.
Your personal and your company’s tax responsibilities depend on whether the director’s loan account is:
- overdrawn – you owe the company
- in credit – the company owes you, as the Director
Is the Loan classed as a benefit in kind?
If the loan exceeds £5,000 at any time in the year then a benefit in kind has to be calculated on the director’s form P11D.
If the director pays the market rate of interest (currently 4%) due on the loan then there will be no benefit in kind. However, the loan amount, benefit in kind calculation and interest payments should still be shown on the form P11D.
If the loan does not exceed £5,000 in the year then there is no benefit in kind.
Tax Implications of having a Director’s Loan Account
Whether your business has to tell HMRC that your director’s loan exists – and pay tax on the outstanding loan amount – depends on when the loan is repaid.
This is not strictly speaking Corporation Tax – it is classified as “Section 455 CTA tax” and is currently charged at 25% of the outstanding amount.
However, in practice, you calculate tax on your overdrawn loan on your Company Tax Return and add it to the Corporation Tax that is due.
The following examples demonstrate how to work out if tax is due, and how much
You pay off your director’s loan account by the end of your company’s accounting period.
Your business does not pay tax on the loan and you do not need to tell HMRC about the loan on your Company Tax Return.
You pay off your director’s loan account within 9 months of the end of your company’s accounting period.
Your company does not pay tax on the loan. However, you must include details of that loan in your Company Tax Return.
You repay part of the director’s loan within 9 months of the company’s year-end.
Tax is charged on the remaining balance. For example, if the balance of the loan from the business to the director was £10,000 as at 5 April 2013, and was £5,000 as at 6 January 2014, the tax would be liable on the remaining £5,000 i.e.£1,250. This would be included in the 5 April 2013 tax return.
What if the loan is written off?
If your business lends you money and then writes it off (meaning you don’t have to pay it back), the loan counts as your personal income. You won’t have to pay tax on the amount (unless you’re a higher rate taxpayer), but you’ll owe Class 1 National Insurance.
How do I have a Director Loan? I have never taken a loan from the company before.
This is one of our frequently asked questions from our clients. The title, Director Loan is misleading as the balance is made up several factors, not just an actual loan drawn. The director’s loan balance takes into account the salary payslips, expense claims and all withdrawals for salary, expenses and directors loans.
If we run a payroll for you of say £1250.00 gross, equating to £1000.00 net – which you should pay yourself, the £1000.00 salary due creates a credit in the Director Loan Account(DLA) until such time that your company pays yourself the salary – to show that the company still owes you, as the director, £1000. When you pay the salary to yourself, this debits the Director Loan Account and assuming you make the correct transfer of £1000.00 – then this would effectively cancel the previous credit entry.
When you submit an expense claim form to us, we process it at this end and as a result this will show that the company is due you, as employee, funds – assuming you paid for the expense personally. This will again credit the Director Loan Account to show that your company is due you X amount in expenses. Once the payment is made from the company to you for the expenses, this will debit and cancel the previous credit entry in the Director Loan Account.
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