Posted November 1, 2016
What is a director’s loan account?
HMRC defines a director’s loan as when you (or other close family members) get money from your company that isn’t:
A salary, dividend or expense related repayment
Money you’ve previously paid into or loaned the company
A director’s loan account is a record of any money you borrow or pay into the company.
A director’s loan account becomes “overdrawn” when the director owes the company money. If the director owes money to the company at the company’s financial yearend and doesn’t repay the loan within nine months of the company’s yearend then the company has to pay a corporation tax charge on the loan (this is often known as Section 455 tax). If the loan is partially or fully repaid, the tax is fully or proportionately repayable nine months and one day after the end of the accounting period in which the loan repayment is made. From 6 April 2016 the rate of Section 455 tax is 32.5%.
If the director repays the loan and then shortly after re-borrows a similar sum, the repayment can be matched to the later advance, giving the effect that the original loan was not repaid.
If a loan to a director exceeds £10,000 and the loan is interest free (or at rate lower than the official rate of interest), you must treat the loan as a benefit in kind and deduct Class 1 National Insurance. You must also report the loan on your self assessment return and pay the relevant level of income tax on the cash equivalent of the loan.
If the company owes the director money, the company doesn’t pay corporation tax on the money lent to it. However, if the director charges interest, the interest would be a business expense for the company and personal income for the director, which may be covered by the new tax free interest allowance available since 6 April 2016 depending on circumstances.
If you have any queries on the completion of a self-assessment tax return, please contact us.
The information contained above is provided for information purposes only and is not intended to amount to advice on which reliance should be placed. We therefore disclaim all liability and responsibility arising from any reliance placed on such information. Professional advice should be obtained before taking or refraining from taking any action as a result of the above contents.