Overview of Director’s Loans Account
A director’s loan is when you (or other close family members) get money from your company that is not part of the normal channels:
- Not a salary, dividend, or expense repayment.
- Money you have previously paid into or loaned the company.
Records:
You must keep records of any money you borrow from or pay into the company. This record is usually known as a director’s loan account or director’s current account.
At the end of your company’s financial year, you must include any money you owe or are owed by the company on the balance sheet in your annual accounts.
Tax on Loans:
You may have to pay tax on director’s loans. Your company may also have to pay tax if you’re a shareholder (sometimes called a participator) as well as a director.
There is a difference in tax responsibilities depending on if the director’s loan account is:
- Overdrawn – you owe the company.
- In credit – the company owes you.
Overdrawn Directors Loan Account:
You or your company may have to pay tax if you take a director’s loan. Your personal and company tax responsibility depends on how the load is settled.
You will also need to check for further responsibilities if the loan is more than £10,000 / if you paid your company interest on the loan below the official rate.
If the loan is more than £10,000 at any time in the year, the company must treat the load as a benefit in kind and deduct Class 1 national insurance. As a director, you must report the loan on a personal self-assessment tax return. You may have to pay tax on the loan at the official rate of interest.
If you paid interest to the company below the official rate, the company must record interest you pay below the official rate as income and treat the discounted interest as a benefit in kind. As a director you must report these on your self-assessment tax return.
The company can reclaim the corporation tax it pays on a director’s loan that has been repaid, written off or released. You cannot reclaim any interest paid on the corporation tax. Claim after the relief is due – this is 9 months and 1 day after the end of the corporation tax accounting period when the loan was repaid, written off or released. Ou will not be repaid before this. Additionally, you must claim within 4 years.
Reclaiming within 2 years:
If you are reclaiming within 2 years of the end of the accounting period when the loan was taken out, use form CT600A to claim when you prepare a company tax return.
Reclaiming after 2 years:
If you are reclaiming 2 years or more after the end of the accounting period when the loan was taken out, you must fill in a L2P form and either include it with your latest company tax return or post it separately.
Director’s loan account is in credit:
Your company does not pay corporation tax on money you lend it. If you charge interest to your company, then the company must count the loan as both:
- A business expense for the company.
- Personal income for you.
This must then be reported on a self-assessment tax return.
Your company must:
- Pay you interest less income tax at the basic rate of 20%.
- Report and pay the income tax every quarter using a form CT61.
By Mark Lawson
