If you take money out of the company bank account for your own use (not as PAYE or as dividends) it is classed as a director’s loan. Paying yourself a director’s loan is one of the ways directors can legally take money out of their company. However you should not simply take the money. It needs to be recorded and accounted for in the right way.
Can only directors take loans?
Director’s loans are open to anyone who can be classed as a ‘participator’ in a company. HMRC defines a participator as a person who has a share or 'interest' in a company. A participator is usually a shareholder who could also be a director. A participator includes any 'associate' - for example, spouse or civil partner, business partner, relative, trustee, or a loan creditor. Any participator may be eligible to take a director’s loan.
Do I have to pay tax on the loan?
If you pay the loan back to the company in the same financial year then you won’t need to pay any tax back on it. In fact, if you pay the loan back within 9 months of the end of the financial year, you won’t need to pay any tax on it.
If the loan is paid back more the 9 months after the end of the year, you will need to pay 25% Corporation tax. If the loan is never paid back, you will need to pay 25% Corporation tax on it.
How could a director’s loan benefit me?
There are several advantages to taking out a director’s loan. Some of these include:
it can be a tax free way to take money out of the company in the short term;
it is flexible which means you can take as much or as little as you like;
if the money is paid back on time you do not have to pay tax on it.
Why is it important to record all directors’ loans?
If you take money from the company account without recording it HMRC are likely to still judge it as a director’s loan and try to charge you Corporation Tax on it. Recording it properly means that you keep HMRC happy, and can clearly demonstrate when the loan has been repaid. This means that you won’t end up paying more tax than you need to.
If you need more help with directors loans or have any questions you can contact us or call our business consultants on 01245 492777