- What exactly is a director loan?
A loan to director or an overdrawn director loan account?
The terminology can get quite confusing
with a director loan account.
So in this video, we will cover
what exactly is a director's loan account
and some commonly used terminology?
How much can a director borrow or lend between them
and their company?
How does the accounting work for a director loan account?
What taxes are potentially payable
on a director loan account, either through borrowing
or lending and the recommended paperwork
for a director loan account.
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According to HMRC, a director's loan
is when you, as a director, get money from your company
that is not a salary, dividend or expense repayment
or money you've previously paid into or loan the company.
Just to add another layer to this definition,
a director loan account can take one or two forms.
That is either money you as a director borrow
from your company.
And we'll refer to this
as an overdrawn director loan account,
or you as a director lending your company money
and we'll refer to this as a loan from director.
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Since October, 2007, there is no limit
as to how much you can borrow or lend to your company
through a director loan account.
However, with regards to an overdrawn director loan,
in reality, you can only really borrow
as much as your company can reasonably afford to lend you
and has liquid cash to do so.
It may be stating the obvious,
but if your company has say 20,000 pounds
in liquid cash in its bank account, at a point in time,
then you cannot really borrow any more than this
at that point in time.
Furthermore, you need to be careful because you will need
a proportion of liquid funds for working capital.
In other words, everyday expenses and costs and taxes
that it is liable for.
From a tax perspective, there are two key thresholds here.
The overdrawn director loans of up to 10,000 pounds
and overdrawn director loans of more than 10,000 pounds.
We'll go into detail on these later in this video.
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Starting with an overdrawn director's loan account,
the accounting entries in your company would be as follows.
Debit director loan account, another word's, debtor.
This means your company is owed this money
at a point in time, so it's recognized on the balance sheet
as an asset.
And credit bank or cash.
This means that liquid funds
have left your business bank account and have been paid
across to you, the director, into your personal account.
When it comes to a loan from director,
the entries are literally reversed
and the director loan account becomes a creditor account.
So in other words, your company has this liability
to pay you the director who becomes a creditor.
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The good news is that if you borrow 10,000 pounds or less
from your company, there is no benefit in kind charge
or interest to pay to your company.
In other words, it's an interest free loan
with a time limit.
You will have to repay this loan nine months
after the end of your company year.
Otherwise you will be subject to what is known
as the section 455 tax charge at 32 and a half percent
of the outstanding loan amount.
So for example, if your company year end
is the 31st of March, and you took a 9,000 pound loan
on the 6th of January earlier in the same year,
you will have until the 31st of December in the same year
to repay the loan, or your company will be faced
with a 2,925 pounds section 455 charge.
That's 32 and a half percent of the 9,000 pounds loan.
A section 455 tax charge is a temporary withholding tax.
And the good news is it is refundable,
should the loan be repaid at some point in the future.
There is an indefinite time limit to repay the loan back,
providing your company remains active and solvent.
And once you do repay the loan,
your company will have four years
to reclaim the section 455 tax charge paid.
If you borrow an amount in excess of 10,000 pounds,
whether in one go or cumulatively,
then the situation changes.
In order to avoid paying a benefit in kind charge,
you will have to pay interest at the HMRC official rate.
Click on the link in the description below
to HMRC's official interest rates.
Say for example, you've borrowed 20,000 pounds
on the 6th of January, HMRC's official rate of interest
is two and a half percent.
So you'd pay 500 pounds per year in interest
directly to your company.
This income is subject to corporation tax.
If you don't pay interest at the official rate
or below the official rate, the benefit in kind charge,
assuming you are a higher rate taxpayer will be 200 pounds.
Plus your company will have to pay
Class 1A National Insurance at 13.8% amounting to 69 pounds
for the year.
And what's more it's strongly advisable
you draw a formal loan agreement
if you do opt to pay interest to your company,
as opposed to taking a benefit in kind charge personally.
If your company has received a loan from you, the director,
then there is no tax implications to either yourself
or your company unless of course,
you decide to charge your company a rate of interest
on the loan, which are well within your rights to do so.
But it must be a commercially viable rate,
quite often, an equivalent market rate for a company loan
from a third party lender.
For you personally,
you will have to declare the interest you earn
on your self-assessment return
and yes, this is taxable on you personally.
For your company the interest paid is classified
as a business expense and gets full corporation tax relief.
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With a director loan accounts or director loans,
whether it's borrowing or lending,
it is important to get the transactions
and paperwork right, to avoid any issues
or complications further down the line.
We put together a free template to director loan agreement,
and some guidelines on the paperwork you will need
for a director loan to get you started.
Click on the link below to head to our site and download it.
So in part two of our director loan account series,
we're going to address the following questions,
given the section 455 tax charge,
why would you even want to take an overdrawn director loan
and some of the benefits of doing so?
What are the benefits of lending your company money
as a loan from director?
What if you don't or never repay an overdrawn director loan?
And something called a bed and breakfasting
and the anti-avoidance measures for when you repay a loan
to avoid the section 455 tax charge,
and simply borrow the money back again soon after.
So click on the bell notification icon
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when we release this video very soon.
I hope this video has helped you understand
some of the basics of a director loan account
in a bit more detail and taking you one step closer
to knowing your numbers.
As always, let me know in the comments,
your thoughts on today's video, or if there are any topics
you'd like us to cover in the future.
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This is Tony Dhanjal for the Accounting and Tax Academy,
thanks for tuning in.
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