What is a Director’s Loan?

What is a director’s loan? Well if you’re considering borrowing money from your company’s account or you want to lend some money to your business then this is the type of loan you’ll need.

The process of lending or borrowing money seems easy, but setting up a director’s loan isn’t as simple as it seems. You’ll need to understand how this type of loan works, interest and tax rates, and the risks involved in company loans.

A director’s loan can be taken out by you, your family, or any other director in your organisation. The loan amount will typically be transferred to or from your company account.

A director’s loan can also involve the loaning of personal money to your company. This typically happens when directors invest their personal funds into starting or maintaining a business. 

Why Take Out a Director’s Loan?

You might need to lend money to your company in order to help the company through financial difficulties or to establish the business and ensure growth during the start-up period.

You could also find yourself in a personal emergency where you may need to borrow money from your business in order to pay for urgent costs. 

It’s important to note that a director’s loan does not include things like paying salaries, business expenses and dividends. 

How Do Director’s Loans Work?

Even if you’re the director of your company, you can’t simply withdraw funds from your business and transfer them. There are a few director’s loan rules you must follow. 

Firstly, you’ll need to get permission from any other directors and shareholders in your company before taking out a loan. This step is essential if the loan is over £10,000, but it’s not needed if you’re the main director or sole shareholder/ owner of the company. 

You also need to ensure you keep in-depth records of any loans paid or borrowed and take into account interest rates, tax and loan period. 

What Is a Director’s Loan Account?

A director’s loan account (DLA) is where any loan records between the director and the company are stored. Here any money borrowed from or leant to your company is outlined. Any additional charges such as tax or interest are also displayed here.

A DLA makes it easy to track a loan and identify when an account is overdrawn or in debit or credit. The difference between the two is simple; if a director owes money to the company then the company will be in debit. A company in credit is the opposite, where money is owed to the director.

Even if you’re the only director moving money to or from the company, you still need to have this account to formalise all these transactions and accurately record them for organisations like HRMC. You can organise your own accounts or utilise an accounting service to help you keep accurate records.

How Do I Repay a Director’s Loan?

The best way to repay a director’s loan is through what is deemed as a ‘genuine payment’.  This involves paying off the loan amount from your own personal funds.

You can also pay off your loan with dividends and salary payments. This is however the lesser preferred option of repayment as although it is perfectly acceptable it does incur additional tax charges.

If you want to claim back money you’ve lent to your company as a director, this is a fairly straightforward process. The money can simply be withdrawn from your company account and recorded in the DLA. Any interest charged on the loan can also be processed as a business expense which in turn can lower tax charges.

All director’s loans need to be paid off within 9 months and one day from the company’s tax period.  If at the end of this period the loan is not fully repaid, the balance is subjected to S455 tax, where the remaining incurs an additional 32.5% corporation tax charge. 

Is There Tax or Interest On Director’s Loans?

Director’s loan tax and interest rates can often be confusing and rates can vary depending on factors like the amount borrowed and the repayment time. 

Tax

If you loan money to your company, there is no corporation tax charge. However, if you charge interest on the loan you will need to report this on a self-assessment tax return as this counts as personal income.

You can also avoid the hassle of paying corporation tax if you repay the loan to your company within the same accounting period the funds were withdrawn. 

However, if your loan amount is over £15,000 a corporation tax rate of 32.5 percent is applied. If the loan isn’t repaid within the 9 months given, you’ll also have to pay corporation tax on the remaining amount as well as interest until the full amount is paid.

The good news is that however complicated the tax process may be, you can claim the tax back once the loan is fully paid off.

Interest

With a director’s loan your company has the freedom to decide interest rates. If you choose to charge less interest than standard HMRC rates this discount becomes a benefit in kind. This means the difference in rates needs to be submitted in a self-assessment tax return and you may be taxed. You’ll also have to pay National insurance at 13.8% of the loan amount too.

Get Advice On Your Director’s Loan With Williamson & Croft 

For further advice or support in managing your director’s loan, get in touch with us at Williamson & Croft. We’ve got a talented team of expert chartered accountants in Liverpool and Manchester that can help advise you on loans, taxes, and everything in between. 

If you’ve got a director’s loan account, our bespoke accounting services can help take the pressure off managing your loan.  We’ll calculate any interest and tax rates and ensure your loan process is as smooth and stress-free as possible.