If you’re director of a limited company looking for a short term loan, borrowing from your company can be a fantastic, cost-effective option.
A director’s loan can be taken in addition to paid salary, dividends and expenses and, if treated as a benefit in kind, no interest is payable. The director would simply need to pay back the loan amount in full, plus the amount of tax due on the interest.
With current director’s loan interest rates at their lowest for 20 years, at just 3%, it can provide an inexpensive and beneficial alternative to any other form of loan.
Tax implications
Tax implications to you as an individual, and to the company, depend on the value of the loan and how quickly it is repaid.
For the individual
If the loan is for more than £10,000 – the company must treat the loan as a benefit in kind and complete a P11D. Interest on the loan is paid by the company as a benefit in kind, but tax would be due on the interest and payable by the director.
For the company
If the loan is repaid within nine months of the company’s financial year end, there will be no tax implications for the company.
Should there still be a balance outstanding on the loan by this date, however, the company will be liable to pay corporation tax at 32.5% on the remaining amount. This can be reclaimed by the company on repayment of the loan, but any interest accrued cannot be reclaimed.
The company also incurs a secondary National Insurance (NI) cost of 13.8% of the value of the benefit in kind.
Documenting and declaring your loan
It’s important to keep records of directors’ loans, and the terms under which they are granted, when the loan is made.
Under the 2006 Companies Act, a loan over £10,000 normally requires shareholders’ approval and their consent should be documented, alongside details of the amount borrowed and any repayment terms set, in a Director’s Resolution.
Loans will only need accounting for in the company’s corporation tax return if there is an outstanding balance to repay at the end of the financial year.
You will also need to include any money you owe the company on the balance sheet in your annual accounts and you must report the loan on your personal self assessment tax return.
A working example
Here’s a working example of a director’s loan of £40,000.
- £40,000 borrowed
- P11D completed to show interest on the loan as a benefit in kind. The current rate of interest is 3%, therefore over one year this would equate to a benefit in kind of £1,200.
- Tax would be due at the director’s rate of tax on the benefit in kind, so a 20% taxpayer would incur a £240 tax bill.
- If the loan remains unpaid at the end of the company’s financial year, the company will be charged tax of 32.5% on the outstanding balance owed (£13,000 if full amount still outstanding). Interest on this corporation tax will be added until the corporation tax is paid or the loan is repaid. The company will have 4 years to reclaim the corporation tax when the loan is eventually repaid, but interest cannot be reclaimed.
Further points to note
It is important to discuss the loan, its purpose and repayment, with your accountant as these rules may change in certain circumstances. Loans made to your spouse are often taxed as though they were made to you, for example, but if the loan is made to a friend or a remote member of the family then it may not always be taxed in the same way.
Your accountant will be able to advise of any opportunities that may limit either the benefit in kind or corporation tax charges.
There are a few exceptions, which can mean no benefit arises, such as if the loan is used for certain ‘qualifying’ purposes by the director, like buying an interest in a partnership.
For advice on directors’ loans, please contact our expert team on 01922 418111.
