DIRECTOR’S LOANS: If you, or a close family member, get money from your company it will be a directors loan – unless it is:
- Your salary, a dividend, or an expense repayment.
- Money you paid into (or loaned) the company on a previous occasion.
Directors Loan Account Records
There are certain records that you would need to keep on any loans taken by a director.
You must keep an accurate record of any money that you borrow from, or pay into, your company. HM Revenue and Customs call this record a ‘director’s loan account’ or DLA.
You would also have extra fiscal responsibilities at the end of your company’s financial year. You must include any money ‘overdrawn’ (what you owe to your company) or money ‘in credit’ (what your company owes you) on the ‘balance sheet‘ of your annual accounts.
Tax on Directors Loan Account
There may be certain tax liabilities due on any directors loans taken out of a company. The company itself, may also be liable for paying taxes if the loan goes to a shareholder (a ‘participator’) who is also a director.
The responsibilities for paying personal and company taxation would depend most on whether the director’s loan account (DLA) is:
- Classed as ‘overdrawn’ (meaning the director owes money to the company).
- Classed as ‘in credit’ (meaning the limited company owes money to the director).
Overdrawn (you owe the company)
So, what happens if you owe your company money? In this case, you, or the company you are running, may need to pay tax after taking a director’s loan.
As a rule, the way you settle the loan would determine your personal and your company tax responsibilities. Even so, there may also be additional tax liabilities if the:
- Amount you borrowed as a director was more than £10,000 (£5,000 in the 2013-14 tax year).
- Interest you paid to your company on the loan was below the actual and average official rates of interest on beneficial loan arrangements.
Personal and Company Tax Responsibilities
|How You Settle the Loan||Personal Responsibilities||Company Responsibilities (if a Shareholder and a Director)|
|Repaid within 9 months of the end of Corporation Tax accounting period||No responsibilities for Income Tax due on the director’s loan||Use form CT600A when preparing a Company Tax Return to show the amount you owe at the end of the accounting period.
If the loan was over £5,000 (with another loan of at least £5,000 up to 30 days before or after repaying it) pay Corporation Tax bill at 32.5% of the original loan, or 25% if the loan was made before the 6th of April 2016. You can reclaim the Corporation Tax (but not the interest) after permanently repaying the original loan.
If the loan was over £15,000 (and you arranged another loan when you repaid it) pay Corporation Tax bill at 32.5% of the original loan, or 25% if the loan was made before the 6th of April 2016. You can reclaim the Corporation Tax (but not the interest) after permanently repaying the original loan.
|Not repaid within 9 months of the end of Corporation Tax accounting period||No responsibilities for Income Tax due on the director’s loan||Use form CT600A when preparing a Company Tax Return to show the amount you owe at the end of the accounting period.
Pay your Corporation Tax bill at 32.5% of the outstanding amount (25% if the loan was made before the 6th of April 2016).
Interest on this Corporation Tax will be added until Corporation Tax is paid (or the loan is repaid). You would be able to reclaim the Corporation Tax (not the interest).
|Loan gets ‘written off’ or ‘released’ (i.e. not repaid)||Pay Income Tax on the loan via Self Assessment||Deduct Class 1 National Insurance through the company payroll. Read more about ‘expenses and benefits: loans provided to employees‘.|
Directors Loan over £10,000 (£5,000 for 2013-14)
The rules for directors loans change if you are a shareholder and a director owing more than £10,000 (£5,000 in 2013/14) to your company. If this situation occurs at any time in the tax year, your company would need to:
- Deduct Class 1 National Insurance.
- Treat the director’s loan as a ‘benefit in kind’ or BIK.
You must use your personal Self Assessment tax return to report the loan. In some cases, tax may also be due on the amount based at the official rate of interest.
Interest Paid below the Official Rate
If you are a shareholder and a director, and you paid interest below the official rate, your company would need to:
- Record the amount of interest you pay below the official rate as company income.
- Treat the discounted portion of interest as a BIK (benefit in kind).
Use your personal Self Assessment tax return to report the interest that you paid. In some cases, tax may also be due on the difference between the official rate and the rate you paid.
Note: A different section explains in detail how ‘expenses and benefits: loans provided to employees‘ works.
Reclaiming Corporation Tax
A limited company would be able to reclaim Corporation Tax paid on a director’s loan once it gets repaid, written off, or released. But, reclaiming any interest paid on the Corporation Tax is not permitted.
You would not get repaid if you claim before the relief is due. The due date is nine (9) months and one (1) day after the end of the Corporation Tax accounting period at the time the loan was repaid, written off, or released.
Note: You would need to claim it back within four (4) years (6 years for a loan repaid on or before the 31st of March 2010).
Reclaiming within 2 Years
Use form CT600A if you reclaim it within two (2) years of the end of the accounting period when you took out the loan. You would make the claim when preparing a Company Tax Return for that accounting period. Alternatively, you can make corrections and amendments online.
You can also use form L2P to claim relief online for loans that have been repaid, released, or written off. Use this method along with your Company Tax Return if (either):
- You are making the amendments to your tax return ‘in writing’.
- You send a tax return for a different accounting period than the one when the director loan was made.
Note: Use your Company Tax Return to notify HM Revenue and Customs how you want to get a refund or interest on your Corporation Tax.
Reclaiming after 2 Years
You can still use form L2P to reclaim it after two years of the end of the accounting period when you took out the loan. Once you fill in the form you can either include it with the most recent Company Tax Return or you can post it separately to:
Corporation Tax Services
HM Revenue and Customs
As a rule, the repayment from HMRC would come via the details given on the latest Company Tax Return. If not, they would send a cheque to the registered office address of your company.
In Credit (the company owes you)
Directors loan repayment rules differ if you lend your company money. In this case, the company would not need to pay Corporation Tax on money that a director lends it.
Charging Interest to Your Company
As a director you can choose to charge interest on a loan made to your company. But, the interest would count as (both):
- A business expense for the company.
- Personal income for the director.
Thus, you would need to report the interest as income on your personal Self Assessment tax return. The company would need to:
- Pay back the interest to the director (minus Income Tax at the basic rate of 20%).
- Use form CT61 to report and pay the Income Tax every quarter.
You can make a request online to get ‘Form CT61 – Return of Income Tax on company payments‘. You can also request the form by calling HM Revenue and Customs (HMRC).