What are director’s loan accounts?
The Director’s Loan Account records the non-dividend transactions that occur between a company and its directors and shareholders. At the end of the company’s financial year, the director would either be owed money or they will owe the company money.
What is their purpose?
This account contains any cash withdrawals made by the director/shareholder as well as any personal expenses paid using company’s money/credit card, where personal expenses are any expenses that do not satisfy the ‘wholly, exclusively and necessarily in the performance of the duties of the employment’ test.
Do you need to charge interest on the loan?
No, you do not need to charge interest on the loan, but it is often advisable to do so. As we'll see later in this article, there are tax consequences depending on how much interest is charged and if the lender is you or the company. Every year, as a UK tax resident you benefit from an interest allowance, so there is a small tax planning opportunity available to you if you are lending money to your business.
When do I have to pay tax on the director’s loan account?
There are two main tax implications for director loan accounts:
- Corporation tax for the company, known as a s445 charge
- Personal tax for the loan recipient
Whether these taxes apply depends on:
- the amount lent,
- the level of interest charged, and
- how long the loan has been outstanding
Taxes if you owe money to the company
Both corporation tax and personal tax may be payable.
The s455 Corporation tax charge
If at the company’s year end, your director loan account is overdrawn by more than £10,000, your company may need to pay tax. However, if the entire amount is repaid within nine months and one day, no tax will be owed.
For example, if the director’s loan account is overdrawn for a company with year end 31 May 2022, the loan needs to be repaid back by 01 March 2023 to not attract tax implications.
If the above conditions are not met, then the company has to pay an additional 33.75% on the amount outstanding. If the loan is from made before 6 April 2022, then the charge is 32.5%. When the loan is repaid to the company by the director, HMRC repays the tax to the company. If you want to outsource handling this work, this is part of our standard accounting service.
Is there a time-limit for refund claims?
Yes, there is a time-limit. You must claim within 4 years.
How long does it take to receive my refund from HMRC?
You will receive your refund nine months and one day after the end of the accounting period in which you repaid your loan. This is a long time, and is why we would encourage you to be careful with managing your loan accounts as it has an impact on your cashflow.
Personal tax and benefit in kind charge
There are three main circumstances where you may have personal tax reporting and liabilities. Note that one or more of these circumstances may apply to you, and in all cases we are assuming you are a director and a shareholder (there are some more technical rules that apply depending on if you are an employee with or without ownership of the company).
The loan is 'written off' or the company goes into liquidation
You need to pay income tax on the loan on a Self-Assessment tax return.
The loan was more than £10,000
The loan is treated as a 'benefit in kind' and you'll need to pay National Insurance contributions and report it on your Self Assessment.
You paid less than the 'official rate' of interest
The official rate of interest is 2%. If you paid interest less than the official rate, the discounted interest will be treated as a 'benefit in kind'.
Bed and breakfasting rules
There have been anti-avoidance rules set by the government to prevent directors to manipulate the director’s loan account and to therefore avoid tax.
This consists of directors repaying the loan before the year end or within the following 9 months to avoid penalties (32.5% corporation tax charge) and then immediately taking out a similar amount from the company shortly after. These rules kick in if a director takes a loan from the business within 30 days of repaying a loan in excess of £10,000. The nature of the loan repayment is also be taken into consideration under the 'motive test' which is there to prevent simply repaying the loan using an external loan, e.g. borrowing funds for say 31 days (from a source other than your company) to temporarily clear the loan account.
Strategies for paying off the loan
The main ways to pay off a loan from your company are:
- Paying dividends - these must be legal, meaning they are paid from retained profits available.
- Paying a bonus - usually the approach taken if there are sufficient reserves for a dividend. This will be treated effectively the same as salary.
- Writing off the loan - the company formally writes off the loan. The amount written off for the director is deemed as dividend income (and taxed accordingly). If the solvency of the company is in question then additional rules are likely to apply,
- Using cash or private funds - you can pay the loan back using your own cash at any time. Be careful about taking a loan out again from the company shortly after clearing it, as this arrangement is likely to be caught by the 'bed and breakfast' rules above.
- Leave the loan outstanding - the s455 charge is temporary and is refunded after the loan is repaid, however, this does represent a drag on your cashflow.
What if the company owes me money?
No corporation tax will be owed by the company on any money it is loaned from the director and you can withdraw this amount at any time tax free.
Any interest that you charge your company would be treated as a business expense for the company and personal income for yourself (this would need to be declared on your Self-Assessment). Your company pays you interest less 20% Income Tax and on a quarterly basis needs to report and pay this income tax on a CT61 form.
Record keeping for director loans
As you can see, you need to keep a close eye on your director loan account to know if you have reporting obligations and tax to pay. As part of bookkeeping for your company, we maintain a director loan account, which is a detailed history of all the loans and repayments made between you and your company.
We recommend having clear records of any loan agreements, including any interest being paid. We can provide template agreements to you if you want to make sure nothing is missed.
HMRC’s own guidance can be found here:
Note the thresholds were slightly different in 2013/14 so if you have an old loan account, it is well worth having a thorough read of this and HMRC’s guidance.
If you need any help with your Limited company's Director Loan Accounts, or filing your annual return, then get in touch.