25th November 2019
So you have been operating via your limited company for a while now. Life happens, and you need access to a certain amount of cash for a while (we will talk about the amount later). Your company has enough in reserves to supply the funds, but how do you go about taking a loan and what are the rules?
What is a director’s loan, and why would you take one from your own company?
We talk about a director’s loan when you receive money from your company that is not a salary, a dividend or funds that you have previously introduced into the company. You also have to have an intention to repay the loan; otherwise, it will be considered a dividend, which will, of course, have personal tax implications.
Taking a loan from your own company has multiple advantages. There is no credit check involved, you can access the funds quickly, and if the loan is below the £10,000 threshold, then there is no potential benefit-in-kind issue to consider.
How do you record a loan?
Once you have withdrawn the required funds by transferring it from the business account to your personal one, your accountant will record it in your accounts in the director’s loan account. It will be shown on the balance sheet amongst other debtors at the end of the financial year.
Every time you make a repayment, inform your accountant, and they will reduce the balance.
Do you need to pay any interest?
As long as the amount is below £10,000 it is not a beneficial loan; however, if you go above this amount then you may have to pay HMRC’s official interest rate for beneficial loans. It is 2.5% (currently) and is chargeable for the entire duration of time when the loan exceeded the £10K limit.
By paying this interest you avoid a taxable benefit-in-kind. The value of the benefit is the interest you avoid paying by borrowing from your company, rather than a high-street lender.
What about taxes?
If you repay the loan within nine months from the financial year it was taken out then you are in the clear; otherwise you’ll have to pay 32.5% tax on it. Fortunately, the tax is recoverable once the loan is fully repaid. Unfortunately, the interest is not recoverable, however.
What is “bed and breakfasting”?
No, this is not turning into a tourism blog; we are talking about repaying a loan to then taking another one out within 30 days. HMRC will consider the original amount as still outstanding and the new amount as additional loan. On higher loans above £15K, this period may be extended further.
What do you need to be careful of?
Any director’s loan written off will have tax implications, so be sure you discuss it with your accountant before deciding.
HMRC – They monitor director’s loan accounts, especially the ones that are above £10,000 and ones that have been outstanding for a while (see bed and breakfasting rule above).
If you have any questions about director’s loans or anything accounting-related please get in touch by emailing firstname.lastname@example.org or calling 0800 917 9100