In previous blog posts we have mentioned how to draw money from your limited company through dividends and wages. If you draw money from your company without following the rules for dividends or wages you may have taken a director’s loan.
What is a director’s loan?
Most limited companies will have a director’s loan account that keeps track of money passed between the owner of a company and the company itself. Normally the balance of this account will be in favour of the owner, due to money paid into the company for starting capital.
You can draw this money out with no problem as this is money the company owes you. If you draw more than this amount, so you owe the company money, you have taken out a director’s loan and may have additional tax to pay. This would be if you draw cash out that is not in the form of wages or a dividend, such as withdrawing money for personal usage or making the company pay for personal expenses.
Corporation tax implications of a director’s loan
If the loan is repaid within nine months and one day of the end of the company’s financial year end, you just have to record the amount in your corporation tax return and there will be nothing additional to pay.
If the loan isn’t repaid within the above deadline additional corporation tax is due for the year end when you took out the loan. This tax amounts to the value of the loan charged at the normal rate of corporation tax (20%). Interest may also be added to this amount for late payment.
Once the director’s loan has been repaid, you will be able to reclaim the corporation tax amount, albeit without interest, from nine months and one day after the financial year end in which the loan was repaid.
If you reclaim within two years of the loan being taken out the tax will be repaid automatically. However, if two years have passed you will need to apply to HMRC in writing for your repayment. You must claim to be repaid the corporation tax within four years from when the loan was repaid.
Income tax implications of director’s loans
If the amount of the loan is less than £5,000 you do not have to worry about there being anything more to do from an income tax perspective.
If the amount is greater than £5,000 you will need to include the amount as a benefit in kind on a form P11d, completed through your company payroll and you’ll need to pay class one National Insurance on it. You will also have to include it on your personal income tax return where you could be charged additional tax on the loan based on the official rate of interest (OROI).
The OROI for the 2014/15 tax year is 3%, you can find the rate for other years here.
If you pay interest on the loan at a rate lower than the OROI you would do the same as above, using the difference between the rate you are paying interest at and the OROI. If you pay interest at the OROI or above, then there is no income tax or benefit to worry about. However any interest paid to the company will count as income that must be reported in the corporation tax return and company accounts.
If the loan is written off or released, meaning it doesn’t have to be repaid, you deduct National Insurance for it through the company payroll and charge income tax for it through your personal income tax return.
How do you repay a directors loan?
There are a two main ways to repay an overdrawn director’s loan, the most common way is to actually pay money into the company’s bank account. Alternatively, the company could offset the money as a payment to the director, such as a dividend payment or wage payment, bearing in mind that these would be taxed accordingly.
If you would like any extra advice or assistance with the above, or with limited companies in general, please do not hesitate to contact us.
