12 September 2024
Table of contents
Table of contents
As the director of a limited company you can borrow money from the business (or lend money to it) and account for it as a director’s loan. There are all sorts of tax implications involved though, so it’s incredibly important to keep good records. We explain what director’s loans are, how they work, and how to account for them in your company’s bookkeeping.
A director’s loan is when you, as a company director, borrow money from your company that needs to be paid back. In other words, it’s a payment you get from your company that cannot be classified as legitimate expenses, dividends, or salary.
It works in reverse too. For example, you might lend money to the company to help it through some cash flow issues, or to invest in research and development and then get the money back when the business grows.
It’s useful to show a separate director’s loan account for each director in the business – that way you can record director’s loans like any other transaction in your business to help you keep track of who owes what.
Software like Pandle (that’s us!) will automatically create a director’s loan account for each director in the business, so transactions can be recorded against it as if it were any other type of bank account.
You’ll sometimes see the director’s loan account referred to as DLA.
The debtor (where the company is owed money) or creditor (where the director is owed money) will be displayed on the company’s balance sheet.
As an aside, you must include any advances, loans, or credits made by a company to a director (and any associates) in the notes when you submit your accounts. This should disclose the loan amount, along with the main conditions, interest rate, and any amounts to be repaid or written off. You don’t usually need to disclose loans given to the company by a director, but in the interests of transparency it’s a good idea to do it anyway.
Director’s loans give access to additional money over and above your salary and/or dividends. They’re handy for covering emergencies or unexpected expenses but they do come with risks, and require time and effort to administer.
They should really be used on a one-off basis as an emergency source of personal funds, rather than as a regular income stream.
Shareholders and long-term creditors don’t look too favourably at DLAs which are consistently overdrawn for long periods of time. Limited companies exist as separate legal entities to their directors, so like any lending facility, avoid over-reliance! Aim to be either at zero or in credit as much as possible.
That said, director’s loans can take many forms and might not always be a simple case of advancing cash into or out of your business. For example:
Also – and this is really important – if a company funds a director’s private expenditure, it’s possible to record the payment as a loan rather than as a business expense. This then avoids National Insurance charges and income tax that would otherwise be due on a “benefit in kind” if the company bears the expense permanently.
If your company is a “close” company (which means there are five shareholders or fewer), then you must record any transactions between friends, family, or other associates. This rule also applies if there are more than five shareholders, but those individuals are also directors.
The interest rate it charges on a director’s loan is entirely up to the company, but just be aware that HMRC will view it as a benefit in kind if the interest payable is less than the official rate.
The average official interest rate is currently 2.25%.
This means you’ll need to pay tax on the difference between the official rate and the rate you’ve actually been paying. The company will also need to make Class 1 National Insurance contributions at a rate of 13.8% of the loan’s entire value.
Technically there’s no legal limit as to the amount you can borrow from your company. But! It’s extremely important that you consider very carefully what the company can realistically lend you, and how long it can manage without that money. Avoid creating potential cash flow problems for the future!
If the director’s loan is more than £10,000 then it’s automatically considered a ‘benefit in kind’, and you’ll need to disclose it on your Self Assessment tax return. You’ll also need approval from each shareholder if the loan is over £10,000.
You must repay your director’s loan within nine months and one day following your company’s year-end. If you don’t, you’re liable for a hefty fine.
Any balance left unpaid after this time will attract a 33.75% Corporation Tax charge (referred to as S455 tax).
The good news is that you can claim this tax back once you repay the loan in full. Just be aware that reclaiming can be a drawn out process, so really, it’s best to just pay up on time if you can.
This is in fact correct! It is the case that a director’s loan can be taken out ‘by accident’ simply by paying yourself an illegal dividend.
It’s not uncommon for directors to take as much of their income as possible as dividends for the purposes of tax efficiency. But dividends can only be paid out from profits, so if your company hasn’t actually made a profit then you can’t legally take a dividend.
The problem can come if you don’t pay close attention to the preparation and management of your accounts, meaning you inadvertently declare a profit that is actually a loss. You then take a dividend thinking your company is in profit. The dividend is therefore illegal and should then be considered as a director’s loan which is recorded in the DLA in the proper way.
It’s yet another reason why we really, really like accurate bookkeeping, and try to make it as achievable as possible.
You might want to lend your own money to your company for any number of reasons, using your director’s loan account to account for the loan.
If you do decide to charge your company interest on the loan, the interest payments you receive are considered income, so you’ll need to include them on your Self Assessment tax return.
As far as the company is concerned, the interest it pays to you is a business expense, and will deduct 20% basic rate income tax at source. The company won’t need to pay Corporation Tax in respect of the loan.
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A content writer specialising in business, finance, software, and beyond. I'm a wordsmith with a penchant for puns and making complex subjects accessible.
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