What is a director's loan?

Director’s loans are an important way for business owners to move money in and out of their company. There are many reasons for doing this. For example, you may want to borrow to take income early or pay unexpected bills. Or you may wish to lend personal money to maintain cash flow or invest for growth.

But to use director’s loans, you need to be aware of the complex rules and potentially onerous administrative and tax implications. In many cases, you will need advice from your accountant.

What is a director's loan?

A director’s loan is money you receive from your company that is not salary, dividend or expense repayment, nor anything previously paid into or loaned to the company. It also applies to anything close family members receive in this way. You can also lend to your company, which puts your ‘loan account’ in credit.

What is a director's loan account and what should it contain?

You must record any money you borrow or pay into your company. This record is called a director’s loan account (DLA). Your annual accounts balance sheet should include any money you owe the company as a debtor, or it owes you as a creditor.

If you have a close company, you may need to record any private payments the company makes to a person associated with the director.

Why borrow from your company?

A director’s loan allows you to access more money than you receive via salary or dividends.

You may need the money to cover unexpected expenses, or if the company is doing well you might want to take more income out before upping your salary or dividends later.

However, director’s loans carry an administrative burden and potential tax penalties, so it may be better to keep them as an emergency source of funds rather than use them routinely. It is also advisable to speak to your accountant before using a director’s loan – especially if the loaned amount might exceed £10,000, and or you might not pay it back within nine months from the end of your accounting period, as penalties generally apply at these points.

Interest rate on director's loans

Your company can decide what interest rate it charges on a director’s loan. However, if it is below the official rate, HMRC may treat the discount as a benefit in kind and levy tax and national insurance contributions (NICs) on it.

Overdrawn director's loan account rules

Your DLA is overdrawn if you have taken more money out of the company, excluding salary and dividends, then you have put back in. This is allowed, but you must obtain prior shareholder approval for loans of more than £10,000.

Can a director's loan account be in credit?

You can loan money to your company - for example, if you need to inject personal cash to start up or make further investments.

Your company pays no corporation tax on money you lend it. However, if you charge interest on a loan, it counts as both a business expense for your company and personal income for you. You must report the income on a Self Assessment return. Your firm must pay you the interest, less basic rate income tax of 20%, and report and pay the income tax using form CT61.

Writing off a director's loan

Your company can write off a director’s loan. To do this, it must formally waive the loan, rather than simply not collecting it, to avoid a technical liability.

The amount written off is treated as a deemed dividend under income tax rules and HMRC will collect class 1 NICs from your company.

As director, you will have to include the amount of loan written off in your Self Assessment tax and treat the amount as dividend with the usual tax credit.

The company will not receive corporation tax relief on the amount of loan written off.

What are the other tax rules on director's loans?

The tax rules on overdrawn director’s loans are complex.

If you repay the loan within nine months from the end of your corporation tax accounting period, use form CT600A to show the amount owed.

If the loan was over £5,000 (and you took another loan of £5,000 or more up to 30 days before or after repaying it); or if the loan was more than £15,000 (and you arranged another loan when you repaid it), pay corporation tax at 32.5% of the original loan, or 25% for loans made before 6 April 2016.

If you do not repay the loan within nine months, use form CT600A and pay corporation tax at 32.5% of the outstanding amount, or 25% for loans made before April 2016. Interest on this corporation tax will accrue until you repay the loan.

After you repay the loan, you can reclaim the corporation tax but not interest.

If your company writes off the loan, NICs and income tax are due on it.

If you are a director and shareholder and you owe your company more than £10,000 at any time, your company must treat the loan as a ‘benefit in kind’ and deduct class 1 NICs. You must report the loan on your Self Assessment return and may have to pay tax on it.

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