If you’re a director of a limited company, you might have wondered if it’s possible to borrow money from your own business. The answer is yes, you can, but there are important rules and regulations you need to be aware of.
This article aims to shed light on this topic, helping you understand the concept of a director’s loan, the legal personality of a limited company, the importance of keeping a record, and the tax implications involved.
Understanding the Director’s Loan
A director’s loan is any money that a director personally receives from their company that isn’t a salary payment, dividends from shares, reimbursement of business-related expenses, reimbursement of money that they have previously paid into the business, or pension contributions.
In simpler terms, it’s money that a director borrows from the business and will have to pay back at some point.
There are several reasons why a director’s loan may occur:
- Withdrawing or transferring cash from the business bank account for personal use
- Using company money to pay for personal expenses
- Using your company bank card for non-business purchases
- Mistakenly paying yourself an illegal dividend
- Making charitable donations in your own name using company funds
The Legal Personality of a Limited Company
When you set up a limited company, it becomes a distinct entity in its own right. It has a legal personality that is separate from its owners (shareholders) and the people who run it (directors). This means that your limited company owns all of its assets and profits, can enter into contracts and borrow money in its own name, and assumes liability for its own debts and actions.
Therefore, you can’t treat your company’s income as if it were your own. You can only legally withdraw funds in one of the ways listed above, or as a director’s loan. This separation, often referred to as the ‘corporate veil’, protects the owners of a company by providing them with limited liability for the debts of the business. It also opens the door to greater tax efficiency – if used correctly.
Keeping a Record: The Director’s Loan Account
It’s essential to keep an accurate record of any funds that you borrow from, or lend to, your company. This record is known as a ‘director’s loan account‘ (DLA). A DLA is ‘overdrawn’ when a director owes money to their company. Conversely, the account is ‘in credit’ when the company owes money to the director.
You can set up and manage a director’s loan account using your accounting software, or you can simply use a spreadsheet, if preferable. If the company has more than one director, you will need to maintain a separate DLA for each person. Each director’s loan account must be updated and included in the balance sheet as part of your limited company’s annual accounts.
Tax Implications of Director’s Loans
When you borrow money from your limited company, you will need to repay it. There may also be certain tax consequences for you or the company, depending on how much you borrow and how quickly you settle the loan.
To avoid significant tax liabilities, you should aim to repay a director’s loan no later than 9 months after the end of your company’s accounting period for Corporation Tax. This period usually aligns with your accounting reference date (ARD), which is your company’s year-end and the date to which you make up the annual accounts.
When preparing your Company Tax Return at the end of your accounting period for Corporation Tax, you must report the outstanding director’s loan balance on supplementary form CT600A. Depending on the amount that you borrow, S455 tax at 33.75% on the overdrawn loan balance may be due under section 455 of the Corporation Tax Act 2010:
- If you owe less than £10,000 and you repay the full balance within 9 months of the end of your Corporation Tax accounting period – no tax is payable by you or the company.
- If you owe more than £10,000 at any time in the tax year – it is treated as a ‘benefit in kind’ and the company must pay Class 1A National Insurance on the loan amount. You may also have to pay personal tax through Self Assessment on the loan at the official rate of interest (currently 2%). However, no S455 tax is payable if you repay the full balance within 9 months of the Corporation Tax accounting period.
S455 tax is a Corporation Tax charge on directors’ loans and it is included in a company’s Corporation Tax bill. It is due at a rate of 33.75% for the 2023-24 tax year, which is in line with the higher rate of dividend tax. The deadline for paying this bill is 9 months after the end of the accounting period.
Therefore, while your Company Tax Return may show that you owe S455 tax on the outstanding loan balance at the end of the accounting period, you won’t have to physically pay the tax if you repay the loan in full within 9 months of that date (i.e. before the deadline for paying your Corporation Tax bill).
‘Bed and Breakfasting’ Anti-Avoidance Rules
In 2013, HMRC introduced measures to prevent directors from repaying a loan just before the 9-month tax trigger date and then immediately re-borrowing the money. This strategy, known as ‘bed and breakfasting’, allowed directors to avoid paying S455 tax on loans that essentially remained unpaid and untaxed for an indefinite period.
Now, there’s a ’30-day rule’ in place. If a director borrows £5,000 or more up to 30 days either side of repaying an earlier loan of £5,000 or more, the company is liable to S455 tax on the original loan amount. There’s also an ‘arrangements rule’ for outstanding loans of at least £15,000 where the 30-day rule is not applicable. Under this rule, the company is liable for S455 tax on the original loan if the director arranges another loan of at least £5,000 at the time of any repayments.
Writing Off a Director’s Loan
A company can write off a director’s loan by deeming the outstanding amount as a bonus or dividend.
If treated as a dividend, this is more tax-efficient, but this is only possible if the director is also a shareholder. As you would expect, the director must report this income on their Self Assessment tax return. The amount will be liable to Income Tax and National Insurance contributions (if it’s a bonus) or dividend tax. The company will not be eligible for Corporation Tax relief on the written-off loan. Additionally, the value of the loan will be liable to Class 1A National Insurance.
Lending Money to Your Limited Company
If you’re a director and lend money to your limited company, your director’s loan account will be in credit. In this situation, you can withdraw money from the company at any time up to the amount you paid in, without facing any tax implications. Your company will not pay any Corporation Tax on the money you lend it. Moreover, you are entitled to charge interest on the loan amount, which also has the benefit of reducing your company’s Corporation Tax bill.
You can choose how much interest to charge and it will count as a business expense for the company, and personal income for you. You will need to report this income on your Self Assessment tax return. Additionally, the company must pay you the interest less the basic rate of Income Tax (20%) and report and pay the Income Tax to HMRC every quarter using form CT61.
Shareholder Approval for Director’s Loans
Some directors’ loans require the approval of shareholders in the form of an ordinary resolution. However, according to the Companies Act 2006, there is no requirement for members to pass a resolution in the following situations:
- The aggregate value of all loans to a director is less than £10,000
- The aggregate value of all credit transactions to a director is less than £15,000
- The loan is less than £50,000 and is intended for expenditure on company business
- The loan is made for the purpose of defending civil or criminal proceedings in relation to the director’s role in the company
When shareholder approval is not required, the director(s) can approve the loan at a board meeting instead, documenting the proceedings and the decision in the minutes.
Should You Borrow Money from Your Limited Company?
Borrowing money from your limited company in the form of a director’s loan can be beneficial. It offers convenience, flexibility, and tax efficiency compared to borrowing from commercial lenders. Under the right circumstances, you can borrow up to £10,000 from your company without the need to pay any tax on the loan. It’s also an effective way to lend money to your company in the short term, as an alternative to taking out a bank loan and paying steep interest rates.
However, directors’ loans are complex and require careful consideration due to the potential tax liabilities and significant administration. What may initially appear to be an easy solution can turn into an expensive and time-consuming burden if you do not comply with the rules and requirements set out by HMRC.
To avoid facing any issues and ensure that you make the right decision for you and your company, we strongly recommend seeking professional advice from an accountant before taking a director’s loan.
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