It may be that you find yourself in financial difficulty or that you need to cover your expenses, an unexpected bill or a one-time payment.
Sometimes, life throws a curveball at you, and as a director of your business (sounds fancy, but that’s what you are) you have specific tools at your disposal.
One of these is the director’s loan. You may not have even heard of it, or know how it could work for you. So in this article, I’ll help you out.
Let’s find out what the director’s loan could do for you.
What is a director’s loan?
Basically, it’s money you take from your business outside of salary dividends etc, done so in the form of a loan.
You’re borrowing money from the business, which at some point, you’ll have to repay.
A different kind of director’s loan would be lending money to the business (so the other way round) for something like start-up costs, or cash flow issues.
This would then make you one of the company creditors, which is pretty cool.
So why would you need to borrow money?
Many reasons, but usually because you don’t have the money available to you.
You’d use a director’s loan to cover short-term or one-off expenses.
But trust me when I say there’s a lot of admin. There’s a risk of heavy tax penalties, too, so it’s not something to put into your weekly routine.
It’s a useful tool to have, so you know if push comes to shove, you’ve got money you can use. Knowledge is power, after all.
How do I know how much loan is left to pay?
To keep track of the loan and money borrowed, you’ll use a director’s loan account (DLA).
If the company is borrowing money, the account will be in credit, whereas if it’s you borrowing money, the account will be overdrawn.
It’s not worth leaving this in an overdrawn state – you certainly don’t want your shareholders to feel concerned about your DLA.
Our advice – always aim for it to be in credit, or zero.
Do I have to pay interest?
Your company determines the interest rate as it sees fit. But it’s worth making the interest rate below the official amount, so you can turn the discount into a ‘benefit in kind’ by HMRC.
You’ll be taxed on the difference between the rate, and the rate you’re actually paying. National insurance will be payable at a rate of 13.8%
This means that you, as director, may be taxed on the difference between the official rate and the rate you’re actually paying. This rate will change over time, due to base rate changes.
How much can I borrow?
There’s no limit on what you can borrow from your company – it’s your business at the end of the day.
But be careful – it’s not worth draining the business if it doesn’t have enough cash to sustain it.
Any loan of £10,000 or more will be treated as a ‘benefit in kind’ and will have to be reported on a self-assessment tax return.
Also, you might have to pay tax on the loan at the official rate of interest. Make sure you check with your shareholders if the loan is above £10,000 or more.
When do I have to pay the loan off?
A director’s loan must be repaid within nine months and one day of the company’s year-end. If not, you’ll get a big tax penalty.
This unpaid balance will be subject to a 32.5% corporation tax charge (known as S455 tax). Ouch.
You can claim this tax back, but it’s a long process and best avoided really.
If you do need to do this, we’d advise talking to us first. We can guide you through the steps, and make sure it all goes through as quickly as possible. But still, it’s a long process.
Talk to us
Give us a shout to talk about all things directors loan.