Many Directors, particularly where the Company is small, can find themselves with an unexpected tax bill as result of Directors Loans. But what are they, and what should you be aware of?
When operating a Limited Company, Directors can withdraw funds as a salary, as expenses or as dividends. Any other funds taken from the Company by a Director are classed as a Directors Loan, and must be carefully managed. Accurate records should be kept throughout the year of any amounts taken out or repaid, which will be shown in the Balance Sheet of the year end accounts.
How do Directors Loans affect your tax position?
Both the Company and the Directors’ tax positions are affected:
- Corporation tax – if the loan is more than £10,000 and the amount owed is not repaid within 9 months of the year end, Corporation Tax will fall due on the amount.
- Personal tax – if the Director’s Loan is more than £10,000, the Director will be personally taxed on the amount. Also if a preferential rate of interest has been charged by the company, this may increase the tax liability.
Benefit in Kind
If a Director’s Loan account reaches more than £10,000 at any time, this becomes classified as a Benefit in Kind. It is reported on the Director’s personal tax return and becomes liable for National Insurance as well as personal tax.
The Corporation Tax liability applies if the Directors Loan is not repaid within 9 months of the company year end. However, there are HMRC regulations to prevent the loan being repaid and immediately redrawn, known and ‘bed and breakfasting’. Any Director’s Loans over £5,000 which are repaid and then taken out again within 30 days remain taxable.
If you’re in any way unsure about what funds you can take from your Limited Company, or the tax implications of doing so, please do get in touch. It’s much better to find out first, than face unforeseen implications!