If you are trading through a limited company, the chances are that there will be a director’s loan account with the business. It is a record of how much money you have lent to your company (which is owed back to you) or how much you owe back to the company. The latter scenario – an overdrawn director’s loan account – is not good as we shall see shortly.
You may need to inject some of your own money to get the business off the ground, or at a later stage if funds run short. You are effectively lending money to the company. You can also increase the balance on this account in various ways – by voting dividends which are not actually drawn out at the time of voting, by mileage claims or by a director’s salary, or possibly rent if you own a property that is used by the company.
The balance will decrease as you take funds out of the company. This might be to fund personal tax bills, regular monthly amounts for living expenses or ad hoc “private” expenses that are not business expenses.
If the company owes you money, you can withdraw it at any time you choose. If there is a reasonable balance, there may be advantages in paying interest at a reasonable rate on the balance. This would be tax deductible inside the company and either all or part of it may be tax free in your own hands.
The flip side is an overdrawn loan account – where you have taken out more than you are entitled to do. This scenario needs careful monitoring and should be rectified as soon as practicable. Can a dividend be voted? Can a bonus be paid?
If the amount exceeds £10,000 and it cannot be repaid within 9 months of the company year end there will be some extra tax that the company has to pay – s455 tax. This is effectively a “loan” to HMRC and they will repay it when the loan itself has been repaid – however, not immediately! This is at a rate of 32.5% so, “borrow” £10,000 from the company and £3,250 has to be paid to HMRC. It is also not possible to “bed and breakfast” i.e. pay off the loan just before the year end and then take a new loan shortly into the new year.
There are also personal tax implications. A benefit in kind charge arises if either no interest is paid, or interest is paid below the HMRC Official rate.
Please ensure you review your director’s loan account regularly!
