A directors' loan with a company can work in both directions; As a director of a company, you can take out a directors' loan from the company or you may also lend your Company money to help with start-up costs or expansion. There are some rules around this area that you must adhere to make sure you stay within the legislation, but don't worry, this article will be able to give you a better understanding of a director's loan.
A directors' loan is the money you, or other close family members receive from the company which is not a salary, dividend, an expense payment or loan repayment. Remember, any money that is held within the company belongs to it and not to the directors or owner personally. This needs to be taken seriously as taking money out of the company without following the necessary steps can have serious consequences.
To make salary payments, the company needs to be registered with HMRC for PAYE. Salary and the deductions should be made through PAYE for income tax and National insurance contributions.
Dividends are paid to shareholders in line with the company profits and they are taxed differently to salary payments.
A directors' loan is not treated in the same way as a salary or dividend as you may not be required to pay tax, depending on the arrangements.
People often use a director's loan to pay off their own bills such as household bills or other expenses. However, remember, income generated by the company belongs to company. So it must either be paid back at some stage or written off. With that, will come with some tax ramifications that needs to be considered when taking a director's loan.
It's the company's responsibility to set an interest rate it charges on a director's loan. This would then need to be adhere to and followed when taking a director's loan. HMRC sets a minimum interest rate for director's loans.
If the company sets an interest charge lower than the one set by HMRC, it will be treated as a 'benefit of kind' by HMRC (this is any non-cash benefit of monetary value that you provide).
That means the director who took out the loan will be taxed on the difference between the official rate and the lower rate the director is paying in interest.
The official interest rate in 2022/23 tax year is 2.00%. This changes over time, the official rates for different years can be found on the HMRC website.
Class 1 National Insurance contributions will also be payable at 13.8% on the full value of the loan.
There isn't a legal limit, just be careful you do not put your company in a cashflow problem! Also bear in mind that any loan of £10,000 or more will be treated as a 'benefit in kind' (see above) and this must be reported in your annual self-assessment tax return.
All directors' loans taken out or repayments throughout the year should be tracked. A good way is to use a form of bookkeeping software or spreadsheet to note all the transactions.
Yes, you can lend money to your company. This should be recorded in your directors' loan accounts.
When you prepare your annual accounts, this should only be put in the balance sheet (also known as a 'statement of financial position').
Loans are not included in the profit and loss statement because it is not reflective of revenues or expenses for the company.
If you owe the company money, (the company has loaned to you), it is shown as a current asset, it is still owned by the company.
If the company owes you money (you have loaned to the company), it is treated as liability, current (less than 1 year period) or a non-current (more than 1 year period).
If the loan is made to you and repaid within the reporting period, then it does not need to be reported on the CT600.
If your Directors' Loan Account is overdrawn at the date of your company's year-end, you may need to pay tax on that. If you pay the whole director's loan within nine months and 1 day of the company's year-end, you will not owe any tax. So for example, if your directors' loan was taken out by 30th June 2022 (reporting period 1st July 21 to 30th June 22). Your loan must be repaid by 1st March 2023.
Any overdue payment of a director's loan means your company will pay additional Corporation Tax. Currently, the rate is 32.5% for laons made before 6th April 2022 and increases to 33.75% for loans made after April 2022. (If the loan was made before 6 April 2016, the rate was 25%). This extra rate is repayable by HM Revenue and Customs (HMRC) when the loan is repaid. Personal tax may also be added to the loan amount if you do not repay it.
If you have an outstanding balance at the end of your accounting period, you must complete the CT600A.
Here's an example, XYZ789 Limited has taxable profits of £7,000 with a corporation tax bill of £1,330 (£7000 x 19%). During the accounting period, the director took out a directors' loan of £10,000 and did not pay that back within the accounting period. That means the company must pay an additional corporation tax of £3,250 (£10,000 x 32.5%) because of the overdrawn directors' loan.
If you have loaned the company money, it is not reported in the CT600, just in the balance sheet.
To report an unpaid loan on the CT600A, turn on the CT600A in the Supplementary section:
You should declare all loans outstanding in the CT600A this in the supplementary pages in box 'A10' and put in the full details of the director's loan(s) in there. Once that has been done, tax will automatically be calculated for any outstanding loans due to be repaid, in the summary information box 'A75' titled 'Tax Payable (Boxes A20 minus total of boxes A45 & A70). This is the CT600A that you would need to complete.
As you can see from the illustration above, Tim Crowder took out a loan in his period between 01/01/2021 – 31/12/2021. He had a tax payable of 32.5% on the loan as it was outstanding. Tim has not been able to repay the loan yet so he has a tax payable of £3,250, on top of the loan he has taken out. Once he has repaid this loan, he will then be eligible for a tax refund, but he needs to claim this back on the accounting period he has paid back the loan in full.
Your company can reclaim the Corporation Tax it pays on a directors' loan repayment, written off or released.
If you repay the loan within 9 months and 1 day of your corporation tax accounting period, you should use the CT600A form when you prepare your Company tax return to show the amount repaid in Box A 25.
If the whole amount is repaid, then the additional tax on the loan will be repayable and the net effect will be zero tax due.
To reclaim in the CT600 complete box A25 in the CT600A. The amount of tax due to be repaid will be calcualted for you. Ensure you complete all the sections in box A25 to ensure the correct rate of tax is applied.
If the loan is repaid after 9 months and a day, this can be reclaimed by re-submitting your CT600 if the repayment was made within 2 years of the accounting period ending.
You will need to complete Box A50 in the CT600A.
If you repay the laon after 2 years of the end of the accounting period you will need to complete form L2P, which can either be completed online or by post.
The company will need to deduct Class 1 National Insurance and report it on the P11D form. The director would then be required to pay income tax on the loan through their own self-assessment tax return.
You can possibly pay yourself an illegal dividend. This happens because a dividend can only be paid if the company have made a profit.
If the company did not make a profit, then legally no dividends can be paid.
If you do not take care in preparing your accounts, you may declare a profit by mistake and pay yourself a dividend. If that is the case, this needs to be treated as a directors' loan and be placed in the directors' loan account.
This is essentially when you take out a loan within the 9-month period but is immediately taken out again to avoid paying corporation tax on it. HMRC have introduced a rule which mean that any directors' loan over £5000 which are repaid and then taken out again within 30 days will not be eligible for tax relief