Who can take a Directors Loan?
In our previous article, we talked about what the Directors Loan Account is and how it might be managed on a regular basis to ensure it does not go overdrawn. But what if you need a loan for an emergency bill, such as a broken boiler, car repair or other personal matter?
If you are a Director, you can take a loan, tax free as longs as it is:
- Repaid within nine months and one day of the financial year end
- Does not exceed £10,000
- Is not borrowed again within 30 days.
If the above criteria are not met, loans under £10,000 attract a 32.5% tax, payable along with the company corporation tax, which will be held by HMRC as long as the loan is outstanding.
Why do I have to pay interest?
Directors loans have not been subject to taxes in the same way a salary or dividends have, in fact no tax will have been paid at all on the sum, so HMRC want to collect their share. If you take a loan, it is therefore advisable to repay it within nine months and one day in full to avoid the 32.5% tax charge.
What if I want to borrow over £10,000?
Loans over £10,000 are subject to ‘benefit in kind’ tax and will need to be recorded on a P11d (the form used to submit benefits in kind to HMRC). The loan will be subject to both corporation and personal tax, as well as Class 1A N.I at 13.8%, making it a rather expensive route to take when all added together.
Directors Loans are monitored by HMRC, who may decide the loan should be treated as a salary, with the associated PAYE Tax and National Insurance becoming payable on the amount borrowed.
What’s the bottom line?
We would suggest only taking a Directors loan in the most necessary of circumstances, keeping the loan under £10,000 and paying back the amount if full within nine months and one day to avoid additional charges and administration.