Even thought the money in your limited company bank account belongs to the company, you as a director can take out a sum of money using director’s loan.
As defined by HMRC, a director’s loan is money take from your company that are not:
a) Salary, expense repayment or dividends b) Money you loaned or previously have paid to the company.
If you have used your own money to pay for business expanses, you can withdraw money to pay yourself back using the company bank account. Remember, all the withdrawals that you make must be recorded in your personal DLA. And if you have more than one director, each one of them must have their own personal DLA.
When your DLA remains in credit, the company owes you money, and you do not have to pay any tax. However, if your DLA is in debit, you own the company money. The debit balance is an interest free loan, and sometimes it may need to be reported to HMRC as a benefit.
Depending on the balance of your DLA, if it is in debit or credit, at the end of the company’s financial year, you either owe money to the company or the company owes you the money. This will be recorded in the balance sheet of your company’s annual accounts as an asset or liability.
What should be in a director's loan account?
a) Any cash withdrawals you've made from the company as a director
b) Personal expenses reimbursed using company funds or a credit card
When must I pay taxes on a director's loan?
You may need to pay tax on your DLA if it’s overdrawn at the company’s year-end. If you don’t want to pay any taxes, you must pay the loan within 9 months and one day of your company’s year-end.
If a director's loan is not paid on time, your firm will be charged an additional 32.5 percent Corporation Tax on the amount owed. When the loan is repaid to the firm by the director, HMRC will repay the extra 32.5 percent to the company. If you do not repay your director's loan, you may be subject to personal tax of 32.5 percent of the loan amount. HMRC does not pay this back when the loan is returned.
What if I owe money to my company?
If you owe your firm more than £10,000 (interest-free) at any time, the loan is considered a benefit in kind, and you'll need to report it on a P11D because it'll be subject to both personal and corporate tax. On top of that, your business will have to pay 13.8 percent Class 1A National Insurance on the whole sum.
In general, for loans of greater above £10,000, shareholder permission is required ahead of time. Because a director is usually also a dominant shareholder in a smaller company, approval is more of a formality than a legal concern.
What happens if the company owes you money?
You don't have to pay Corporation Tax on money you personally lend to your company, and you can withdraw the entire amount at any time.
If you charge interest, it will be a business expense for your firm and personal revenue for you. The interest must be disclosed as income and taxed proportionately on your Self-Assessment.
Interest rates on DLA?
There are strict requirements governing the timing of repayments and any interest imposed or collected if you lend money to your firm or obtain a Director's Loan from your company. The Gov.uk website describes the different rates and restrictions you should be aware of; however, we recommend speaking with an accountant to avoid falling foul of HMRC.
Written off DLA
The company can decide to write off DLA if the loan account becomes overdrawn, but there are tax and accounting implications that you need to think about. For that, it is recommended to speak to an accountant to decide what is the best way for you and your business.
Do HMRC keep track of director loans?
HMRC monitor DLA’s that are regularly overdrawn through the company’s annual tax return. If the HMRC decides that the loan is a salary, they may charge Income Tax and NI on the sum. We recommend that you keep track of your director's withdrawals to make sure you don't go over the £10,000 limit.
Directors should be informed that if the company borrows too much money and is unable to pay its creditors, the company may be put into liquidation, and the liquidator may pursue legal action against the directors to recover the debt.
If you would like more information, please contact our customer engagement team who would be delighted to assist you further.