Limited Company Directors Loans
What are Directors Loans?
Directors Loans are payments to or from a limited company, made by a limited company director.
The payments may be classified as directors loans if they are not directors salary payments (PAYE), dividends or expense reimbursements.
Directors loans may also accrue where a director has paid for limited company expenses from a personal account and has not yet reimbursed themselves.
Why would a limited company director want to take a directors loan?
A director may loan monies to a limited company for many reasons. For example, directors loans may be used to cover initial start-up expenses, manage the companies cash flow, or to cover the costs of the company purchasing a capital asset.
Directors loans can be repaid tax free to the director and are not included in the director self-assessment tax return.
When would a company need to pay tax on directors loans?
Directors loans owed by a limited company to a director are tax free.
However, directors loans owed by the director to a limited company can incur tax in some circumstances. Where less than £10,000 is owed by a director to a limited company, provided this in paid back to the company within nine months of its accounting year end then no tax is applicable.
Where more than £10,000 is borrowed by a director or where repayment isn't made S455 tax is applicable. This is applied at 32.5% in the limited companies corporation tax return. The S455 tax is then credited once the directors loan balance is repaid.
Does a record need to be kept of directors loans?
Yes, the company should keep a record of directors loan to and from the company.
If the company used accounting software, then this can be used to keep a record of the directors loan account.
A record of the directors loan account can be requested by HMRC.
Can more than one director in a limited company pay a directors loan?
Yes, multiple directors can have directors loans paid into or out of the limited company.
Are there any limits on how much a director could borrow from a limited company?
If a directors loan of more than £10,000 is repaid by a director, then no further loan over this amount can be taken by the company within 30 days.
This is a method sometimes used to avoid tax by repaying the borrowed money to a company before the accounting year end to avoid S455 corporation tax, only to immediately take the loan again.
Where this happens, the view of HMRC is that the director doesn’t intend to pay the money back and the full amount will automatically be taxed.
Can Directors Loans be written off?
Yes, but there are accounting and tax implications to doing so.
If the company writes off the director's loan owed to it, it will be treated as a taxable benefit in kind to the director.
The amount of the loan written off will be considered income by HMRC and will be taxed at the director's marginal tax rate. This is reported and paid via a self-assessment tax return.
Further Advice
For further information and guidance on directors loans you can email will@matrixaccountancyservices.com or call 01788 486065