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Director’s loans – A missed tax planning opportunity?

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Director’s loans – A missed tax planning opportunity?

A director’s loan is a form of profit extraction from your company, often used alongside salaries, dividends and expenses.  

Essentially, you borrow money from your own company that is not accounted for by one of the other profit extraction options.  

Director’s loans are a popular way of accessing capital tied up in your business without creating immediate personal tax liabilities – but you should still take the time to plan! 

Personal tax 

Income Tax  

You don’t normally pay Income Tax on director’s loans as the tax liability sits with your business.   

However, the loan may be ‘written off’ or ‘released’, i.e. not repaid.  

In this instance, you must report it via Income Tax Self Assessment (ITSA) and pay Income Tax on the loan.   

Your company must also deduct Class 1 National Insurance (NI) through its payroll.   

A note on benefits  

A director’s loan may be considered a type of benefit in kind (BIK), a benefit which an employee or director receives which is not included in their salary.  

This can create additional personal tax liabilities.  

For a loan of £10,000 or more and free from interest, you will need to report it via ITSA and your company will need to deduct Class 1 NI via its payroll.  

Business tax 

Corporation Tax  

Director’s loans can create a Corporation Tax liability if they are made to a director or shareholder of a close company, as dictated by Section 455 CTA 20100. 

This is a UK-resident company which is controlled by either:  

  • Five or fewer participators (shareholders or any others who have shares or an interest in the company capital or income)  
  • Any number of directors who are also shareholders.  

However, companies may be exempt from these regulation if: 

  • You are employed full-time by the company  
  • The loan does not exceed £15,000  
  • You hold no material interest in the company (i.e. no more than five per cent of the ordinary share capital, or five per cent of the company’s assets).  

If you can, repay the loan within nine months of the end of your business’ accounting period (AP) to avoid additional tax on the loan. After the loan is repaid, your company can reclaim Corporation Tax.  

If the loan is repaid within this time period, your Corporation Tax rates and liabilities will be as follows:  

  • A loan of more than £5,000 (and another loan of £5,000 or more was taken out up to 30 days before or after the original loan was repaid) – Corporation Tax is due at 33.75 per cent.   
  • If the loan was more than £15,000 (and another loan was arranged upon repayment) – Corporation Tax is due at 33.75 per cent.   

Corporation Tax will be due on the outstanding amount at 33.75 per cent, as shown on the Company Tax Return, if you don’t repay your loan within the given period. 

Compliance 

You must properly manage and record all director’s loans through a director’s loan account (DLA) in order to remain financially compliant with legislation.  

HMRC can ask you for information on director’s loans at any time, so you should have these records updated and easily accessible.  

You must keep detailed records of any money which you have withdrawn from the business or paid into it, as well as any tax you have paid and details of any written-off loans.  

For further advice on director’s loans and financial planning, please contact our team today. 

 

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