As a business owner, there may be times when you need to borrow money from your Limited Company. Regardless if you need it for a new car, or you want to put a deposit down on a house, a Director’s Loan Account might be the only solution if you don’t wish to take dividends.
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 you have not charged the official rate of interest (2%) on this loan, then this will be classed as a benefit in kind provided by your company. You have 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 at 13.8% on the benefit (increasing by 1.25% from April 2022). Plus, you as an individual would also need to include the benefit on your personal self-assessment tax return which would be subject to income tax. To avoid the benefit in kind implications, if you are taking a loan above £10,000, we’d recommend setting up a formal loan agreement with your company and charging HMRC’s official rate of interest (currently 2%). Please note with the £10,000 maximum limit, this includes a number of items; any specific loans, overpaid salary and overpaid expenses. Therefore if you were to take a loan of exactly £10,000 in the year but then accidently overpaid your 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, which will be 32.5% (increasing to 33.75%) 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.
- You owe your company money – One thing to bear in mind is that if you are taking a loan from the company, you are using up the funds built up in the business. Before taking the loan you will need to 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 you don’t believe the loan will be repaid back in time.
- Avoid ‘bed and breakfasting – HMRC use this term if you take out another loan from your company, straight after you have just paid one back, especially if this is done to avoid the s455 charge. If you have repaid your loan, and then take 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 you had a company year-end of 31 March 2021, the corporation tax payable date for this 9 months and 1 day after, would be 1 January 2022. You would need to make sure all loans were repaid by this date in full to avoid the s455 charge.
If you were to have taken an interest free loan of £15,000 from the business and this is not repaid this back in by 1 January 2022, the s455 charge of 32.5% on the outstanding loan would be due in addition to the corporation tax. Therefore, you’d have to pay the charge of £4,875 to HMRC, by 1 January 2022.
If you were then to repay the loan in full back to the business on 1 June 2021, when you come to complete the next corporation tax return for the company year end 31 March 2022 you will then be able to reclaim the s455 charge of £4,875 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% = £375. 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. Whilst, the £375 will also be added on as additional employment income on your personal self-assessment, of which you’ll pay 20% or 40% income tax on this amount depending on if you are a basic or higher rate tax payer.
We recommend director loan accounts are only used as a short term measure, and not as long term finance.
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