Put simply, a director’s loan is when you take money from your company that is in excess of:
- a salary, dividend or expense repayment due to you.
- money you’ve previously paid into or loaned the company.
It is money that you as Director borrow from your company and will eventually have to repay unless the excess can be covered by a dividend. Bear in mind that a dividend can only be declared if there are sufficient profits after Corporation Tax to support it. Tax planning of when the dividends are declared also must be taken into consideration.
A Director’s loan must be repaid within nine months and one day of the company’s year-end and any unpaid balance at that time will be subject to a 33.75 per cent corporation tax charge (known as S455 tax).
The loan account balance must be shown on the company’s corporation tax return (CT600) and the S455 tax is payable nine months and one day from the end of the relevant accounting period.
Any loan over £10,000 will also be personally taxed and needs to be recorded as a Benefit in Kind.
Tax paid by the company is usually temporary and can be reclaimed from HMRC once the loan has been repaid in full, however, this can be a lengthy process.
The use of a Directors Loan can be helpful in respect of tax planning but needs to be carefully considered.
