What is a directors loan?
Did you know that you can take money out of your business as a limited company owner?
What is a director’s loan?
A director’s loan is money taken from the company that isn’t classed as salary, dividends or another type of expense. As any money made by a limited company belongs to the company not its directors, you will need to repay your directors loan back to the company.
A director’s loan could also be when a director lends money to the company. This would make the director a creditor of the company.
When to take money out of your company
You should only take money out of the company as a director’s loan for a short term expense or as emergency funding. This should be an amount of under £10,000 otherwise it will be treated as a benefit in kind. It will need to be reported on your Self Assessment tax return and you should have to pay tax on the loan too.
Before you take money out of the company you should make sure you get approval from your shareholders.
How to record a directors loan
You record your directors loans in the directors loan account in your chart of accounts. This account is used to keep track of all transactions between the company and the director(s).
In Bokio accounting software, this is account 2301. If you have multiple directors in your company then you should record each directors loan separately. We have accounts 2302, 2304 and 2305 for additional directors.
It’s important to record directors' loans in this account and check in on a regular basis. You need to make sure that the account isn’t overdrawn for too long. This can be considered an interest-free loan which has harsh tax implications.
The easiest way to keep track of your directors loan account is by using accounting software. If you keep it up to date with all your transactions then you can keep track of this account and avoid any surprises at year end.
If it’s possible to avoid having large balances in your directors loan account, or aiming for no balance at all, this will be the best position to be in to have a healthy company.
Repaying directors loans
A director’s loan when money has been taken out of the business must be repaid within nine months and one day of the company’s year-end, or you will face a heavy tax charge.
If the director owes the limited company money at year end, in some cases s455 tax can be payable on this loan at 32.5%.
Once you’ve repaid a loan you must wait at least 30 days before you can take out another one. Not following this rule is considered tax avoidance.
Tax on directors loans
There are some important things to know about tax relating to directors' loans, whether you lend money to the company or withdraw money from it.
When you lend money to the company:
- Your company won’t pay Corporation Tax on money you lend it.
- You can charge interest on a loan to the company, but you’ll need to declare it on your Self Assessment tax return as income.
- Your company needs to both report and pay the income tax each quarter.
When you take money from the company:
As long as you pay the money back to the company before year end then you won’t pay any tax on it. As we mentioned before, if you don’t, then depending on the amount and how long it takes to pay back you will end up paying taxes on it.
Manage your limited company finances with Bokio
Bokio is a simple way to do your accounting, invoicing and more online. Our software takes you through the process step by step, with time saving features like automated bank feeds, smart bookkeeping templates and integrated invoicing. If you need help with your accounting, you can invite your accountant or colleagues to work together in Bokio.
Bokio makes managing your finances easy so you have more time to spend running your business.