What is a Director's loan?
In simple words the directors loan is a loan that a director takes from its company (which is a separate legal entity). Since it is a “loan” the director has to return it to the company therefore a directors loan would be any money that the director is taking out from the company for personal use. It is not the salary, a dividend or an expense repayment. This also has nothing to do with the money you have previously paid into or loaned the company.
Why would I need to take a Loan from my Company?
You might have to borrow money from your company to cover your personal expenses. These could be any one off unexpected bills which could not be covered by the salary the company pays you and you were also not able to get any dividend since the company did not make any profits. However, if your company has enough liquid cash you might be able to borrow money from the company. This will be treated as a loan to the director and you will have to pay interest on it. This interest can be the market rate or it can be lower than the market rate depending on how things are settled between you and the company,
Directors should not borrow money on a regular basis as this comes with additional administrative work and also there are risks associated with it such as penalty costs if not paid on time.
How Much Loan can I borrow from a company?
You can borrow as much as your company can afford to lend. Although there is no legal limit, you would not want to borrow all the liquid cash from your company and exhaust its funds as this will create cash flow problems for the company.
Furthermore, there is a threshold of £10 000. If you borrow more than £10, 000 then it is treated as benefit in kind and the company will have to pay National Insurance on it. As a director you will have to report it in the self assessment tax return and pay taxes on it.
When Should I Repay The Loan?
The loan should be paid within 9 months of the corporation tax period. Corporation Tax will be charged on any unpaid loan at that time.
How much interest will be charged on the loan ?
It is upto the company as to how much interest they will charge on the loan. If the interest charged on the loan is below the market value then the difference will be treated as a benefit in kind and tax and National Insurance will be paid accordingly.
How and why Should I keep a record of the Directors Loan?
As part of your bookkeeping process you should maintain a directors loan account. In the directors loan account you should record all the money borrowed from the director or the money lent to the director.
You should have a proper record of the money borrowed from the company or money given to the company as a loan from the director because at the end of the financial year you will have to include in the balance sheet any money the director owes to the company (overdrawn) or if the company owes to the director (credit)
For more information on Directors' loans and how they will be treated in your accounts please contact Taxaccolega at 020 8127 078 and our team of accountants will be happy to help you. We will guide you on your personal taxes, corporation tax and your payroll.