If you take more money out of the company than you put in, and it isn’t salary, dividend or an expense repayment, it is called a director’s loan. If the company makes loans to directors it must keep detailed records of these transactions. Such transactions are usually posted to what is known as the ‘director’s current account’ or the ‘director’s loan account’.
There are various corporation and personal tax implications depending on how much money is loaned to the director and when / how the loan is cleared.
1. If the loan is less than £5,000 during the whole of the financial year
There are no tax implications for either the company or the director.
2. If the loan is above £5,000 at any point during the financial year
The loan will need to be declared on a form P11D for the director and the company will need to pay Class 1A national insurance contributions.
The difference between the interest due on the loan based on the official interest rate and the interest paid to the company may be taxable on the director.
3. If the loan is repaid within 9 months and 1 day of the financial year end
There are no additional tax implications for the company or director.
4. If the loan is not repaid within 9 months and 1 day of the financial year end
The company will be required to pay 25% of the outstanding amount to HMRC as corporation tax. Interest will accrue on this amount until the corporation tax is paid or the loan is repaid. The company can reclaim the corporation tax once the loan has been repaid.
5. If the loan is written off
Although the write off of a director’s loan may seem appealing it can be costly as there may be tax and national insurance implications for both the company and director as if the director has received additional remuneration in the year.
The information provided above covers only the basic rules of directors’ loans – it is always advisable to consult a professional when dealing with taxation issues.
Tracy Newman can advise on director’s loans.