The money in your limited company bank account might belong to the company, but as a director of the company, you can make withdrawals using a director’s loan.
It can be defined as money taken from your company that isn’t a salary, dividend or expense repayment; or money you’ve previously loaned the company.
Personal business expenses can be paid back to yourself with the company bank account. All other withdrawals you make from your company bank account must be recorded in your personal directors’ loan account (DLA) by all company directors.
If your personal DLA remains in credit, then the company owes you money and you don’t have to pay any tax. But, if your personal DLA has a debit balance, then your DLA is overdrawn and you owe the company money.
Depending on your DLA, at the end of your company’s financial year, you’ll owe the company money or it will owe you. This will be recorded as an asset or a liability in the balance sheet of your company’s annual accounts.
What a directors loan account should contain
Items you should record in your DLAs are:
- Any cash withdrawals from the company that you’ve made as a director; and
- Personal expenses that were paid with company money or credit cards.
For the lowdown on what business expenses and what you can and can’t claim, check the government’s guidance or ask your accountant.
HMRC reviews your DLA through your company’s annual tax returns to ensure you’re following the guidelines.
Taking out a director’s loan
A director of your business can take out the loan. You may need to take money from the company for many reasons, such as unexpected personal expenses. The loan is money that still belongs to the company. This loan will not have been subjected to personal or company tax and HMRC will need to be paid what is owed.
Paying tax on a director’s loan
If your DLA is overdrawn at the date of your company’s year-end, you may need to pay tax. If you pay back the entire director’s loan within nine months and one day of the company’s year-end, you won’t owe any tax.
In other words, if your DLA is overdrawn at your company’s year-end of 30tApril 2022, the loan must be paid back by 1
Overdue payments for your loan will result in corporation tax of 33.75% for the 2022/23 tax year on the figure that is outstanding.
There may be a personal tax of33.75% of the loan amount if you do not repay. This will not be refunded by HMRC once the overdue amount is paid. You might be required to supply a benefit in kind form P11D for an overdrawn DLA. The company might have to pay employers national insurance contributions at 15.05% of any benefit in kind provided, including the director’s loan.
Recording director’s loans
Everything must be recorded in your company’s accounts, as when you created your limited company, this established it has its own statutory obligations and accountabilities.
Owing your company money or being owed by your company
If you owe your company money over £10,000 (interest-free) at any given time, the total loan amount is classed as a benefit in kind and you’ll need to record it at the end of the tax year on form P11D, as it will be liable to both personal and company tax.
For the 2022/23 tax year, your company will need to pay Class 1A national insurance at the 15.05% rate on the full amount.
Your company does not pay any corporation tax on the money you personally lend to it. If you charge any interest, this is classed as a business expense for your company and personal income for you. As such, you must declare the interest as income on yourself-assessment when you submit it to HMRC.
Speak to us today to find out how we can help you navigate Directors’ Loan Accounts and the potential associated tax.
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