Director’s Loans: Tax Implications and Responsibilities
Understand the tax implications of director's loans, how to manage the director's loan account, and your responsibilities as a director and shareholder.
A director’s loan occurs when you or your close family members receive money from your company that is not a salary, dividend, or expense repayment. It’s important to keep a detailed record of these transactions, known as a ‘director’s loan account.’
Managing the Director’s Loan Account
- Record Keeping: Document any money borrowed from or paid into the company. This record should be included in the ‘balance sheet’ of your annual accounts.
- Overdrawn vs. In Credit: Your tax responsibilities vary depending on whether the account is overdrawn (you owe the company) or in credit (the company owes you).
Tax Responsibilities
If you owe your company money, you or your company may have to pay tax. Key tax considerations include:
- Loan Amounts Over £10,000: Additional tax liabilities may arise if the loan exceeds £10,000 or if you pay interest below the official rate.
- Corporation Tax: Loans not repaid within nine months of the end of the Corporation Tax accounting period are subject to a 32.5% tax rate (25% if the loan was provided before April 6, 2016).
- Written-Off Loans: If the loan is written off or released, it must be included in your self-assessment tax return, and Class 1 National Insurance may be payable through the company payroll.
Claiming Tax Refunds
Your company can claim a refund of the corporation tax paid on a director’s loan that has been repaid, written off, or exempted. The claim must be filed within specific time frames:
- Post-Compensation Claim: Filed nine months and one day after the end of the income tax reporting period when the loan was resolved.
- Claim Deadline: Must be within four years (or six years if repaid on or before March 31, 2010).
Additional Considerations
- Lending Money to the Company: No corporation tax is paid on money you lend to your company. Interest charged on such loans is considered both a business expense for the company and personal income for you.
- Reporting Interest: Report this interest on your personal Self Assessment tax return. The company must pay you the interest after deducting basic rate income tax (20%) and report and pay the tax quarterly using form CT61.
Understanding these aspects of director’s loans ensures you comply with tax laws and manage your company’s finances effectively. Proper record-keeping and timely tax payments are crucial to avoiding penalties and ensuring smooth operations.
