What is a Director’s Loan?
HMRC states that a director’s loan is money taken from the company account. However, it has to be money that isn’t one of the following:
- A contractual payment like your salary
- Money that you’ve previously loaned to the company
That means any money that’s taken from the corporate account outside of your contractual payments is classed as a director’s loan.
Any money that’s taken from the company account must be recorded.
A Directors Loan Account should be used to record all transactions between the director and the company. It’ll help you keep on top of what money has been paid, when it is due to be repaid, and any tax that you might owe.
What is the Tax Position?
Sadly, a director’s loan can come with tax implications. The amount you owe depends on the amount of the loan, and whether it has been repaid in the time frames provided by HMRC.
If the loan hasn’t been repaid nine months after the company accounting period comes to an end, you’ll need to pay section 455 tax. This will be 32.5% of the original loan (or 25% if the loan was made before 6 April 2016). After the loan has been repaid, you can reclaim what is in effect considered to be a holding tax.
You’ll also need to check if you have additional tax responsibilities if one of the following applies to you:
- The loan was more than £10,000 (£5,000 in 2013-14)
- You paid your company interest on the loan below the official rate
If, however, you’ve repaid the loan in the time frame and don’t exceed the £10,000 limit, you won’t have to pay any tax at all.