If you take more money out of a company than you’ve put in - and it isn’t salary or dividend - it’s called a director’s loan.
Remember: You and the company are totally separate. The company’s money is not your money!
If your company makes a loan to any of its directors, then you must keep records of these director's loans.
Director's Loan Account: The Basics
Unfortunately one of the key things people forget is that each time you take money out of the company to pay for a personal bill or to put into your own bank account this may result in an overdrawn director’s loan account.
HMRC doesn’t like you having the benefit of an interest free loan from your company and unless you do something to pay back the money both you and the company will be penalised.
Director's Loan Account: Impact on You
If you have a director's loan account, HMRC will charge you tax on the benefit of having an interest free loan during the tax year if this loan is greater than £10,000 at any time (this benefit will need to declared on a P11d). The figure was £5,000 for 2013/14 and earlier tax years.
The benefit is calculated by working out the interest you would have paid on an equivalent loan from a third party - HMRC use their own interest rates which you can see here.
Director's Loan Account: Impact on You - Example
Let's assume you had a director's loan account from your company and this was for more than £10,000 during the whole of the tax year ended 5 April 2018. HMRC's ‘official rate’ of interest for this period is 3%.
You will be taxed on £10,000 at 3% = £300.
The simplest way for you to avoid this charge is not to have your director's loan account go overdrawn by more than £10,000 at any time during the tax year.
However, if your director's loan account does go overdrawn by more than £10,000 and you don’t want to have the headache of preparing a P11d, then the company can charge you interest on your overdrawn loan account - in effect this means it's no more beneficial for you to borrow money from a third party than from your own company. We recommend to clients that they use HMRC's interest rates to calculate the interest payable (as shown here). This interest is added to your loan and you will need to pay this back to the company at a future date. Also the company will be liable to corporation tax on the interest it charges.
Director's Loan Account: Impact on The Company
HMRC will charge the company corporation tax at 32.5% on the balance of any director's loan made to you which is still outstanding 9 months and one day after the end of the company’s accounting period – this applies even if the loan is less than £10,000.
Director's Loan Account: Impact on The Company - Example
The company’s accounting year end is 31 March 2018. You owed the company £10,000 as at 31 March 2018 and on 1 January 2019 this amount is still owing.
The company will be taxed on £10,000 at 32.5% = £3,250.
This tax will be repayable when you repay the loan to the company – but be aware there can be a significant time lag before the HMRC pays you back!
Our eBooks cover this and many other topics. Check them out here.
And if you'd like to know how we can help you with all of this, or with anything else, feel free to give us a call on 01202 048696 or email us at [email protected].