There may be times when a company wants to lend money to a director or a director lends money to a company.
What is a Director’s Loan Account?
A director loan account can be made up of various items; accidental overpaid salary or expenses at the end of the accounting period, excess or ultra vires dividends if you have taken more than the profit available or it can simply be a specific loan that you have taken from the company.
However, we’d only recommend using a Director Loan Account as a short term solution as this can cause adverse tax implications and may lead to cash flow issues if this is not managed well.
A few things to bear in mind:
- Borrowing more than £10,000 can be classed as a benefit in kind – If the Director’s Loan Account becomes overdrawn by more than £10,000 at any point in the tax year and the company has not charged the official rate of interest on this loan, then this will be classed as a benefit in kind provided by your company. The Director has had the benefit of an interest free loan and this would need to be disclosed on a P11d, for which the company would pay Class 1A national insurance on the benefit. Plus, the Director would also need to include the benefit on their personal self-assessment tax return which would be subject to income tax. Please note with the £10,000 maximum limit, this includes a number of items; any specific loans, overpaid salary and overpaid expenses. Therefore if a Director was to take a loan of exactly £10,000 in the year but then accidently overpaid their wages by £10, as the loan balance then exceeds £10,000 at some point in the tax year, this would trigger the benefit in kind implications.
- Corporation Tax charge on loans outstanding after 9 months – HMRC will charge what is know as an s455 charge on outstanding loans that have not been repaid to the company within 9 months and 1 day of the company year-end. The s455 charge is payable in addition to the corporation tax in the year, with the same payment date. This charge is effectively a repayable loan to HMRC, for having a loan account outstanding after the 9 months and 1 day, and once you have repaid the loan to the company, you can request the s455 charge back from HMRC when the next corporation tax return is filed.
- The Director owes the company money – One thing to bear in mind is that if a company is making a loan to a Director, it is using up the funds built up in the business. Before making the loan the company should consider the cash flow into the business to make sure the business can still settle VAT, PAYE, Corporation Tax and the additional s455 charge if the loan is not repaid in time.
- Avoid ‘bed and breakfasting – HMRC use this term if another loan is made to a Director, straight after they have just paid one back, especially if this is done to avoid the s455 charge. If a loan has been repaid, and then another taken out another within 30 days, this will then count as if the loan has not been paid back.
An example of taking a loan from the company:
If the Company year-end is 31 March 2023, the corporation tax payable date for this 9 months and 1 day after, would be 1 January 2024. Any loans would need to be repaid by this date in full to avoid the s455 charge.
If there was an interest free loan of £15,000 from the business and this is not repaid this back in by 1 January 2024, the s455 charge of 33.75% on the outstanding loan would be due in addition to the corporation tax. Therefore, you’d have to pay the charge of £5,062.50 to HMRC, by 1 January 2024.
If the loan was paid back in full to the business on 1 June 2024, when it comes to complete the next corporation tax return for the company year end 31 March 2024 it will then be able to reclaim the s455 charge of £5,062.50 back from HMRC.
In addition, as the loan is above £10,000, with no interest charged then the benefit in kind implications will apply in the tax year too. If the loan was outstanding for a full tax year, the benefit in kind would be £15,000 x the official rate of interest of 2.25% = £337.50. The company will pay 13.8% on this amount for Class 1A national insurance = £51.75 payable by 22 July, following the tax year in which the benefit was provided.
How Aardvark Accounting can help you?
We can help you to get your head around how a Director’s Loan Account works, and simplify the jargon for you. Plus, we’re the best value for personal service and have tailored accountancy packages to suit you.
We’ll always have someone on hand to put your mind at ease from your financial business worries, contact Aardvark Accounting today. We’ll do the “aard” work for you!
01425 471917 or contact us here