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A limited company will have a company bank account or maybe cash reserves. This money belongs to the company. If you are a director of the company, you can withdraw money from the company using a director’s loan.

In this post, we’ll address some of the basics on director’s loans and director loan accounts. Read on to find out what they are and the tax implications of having an overdrawn director’s loan account.

What is a director’s loan account?

A director’s loan is defined by HMRC as money taken from the company that is not a salary payment, dividend payment or expense repayment.

At the end of the financial year, the company will either owe money to the director or be owed money by the director. This should be reported within the assets and liabilities section in the balance sheet of the company’s annual accounts.

Can I take a personal loan from the company?

Yes, it is possible for a director to take a personal loan from the company, as long as it is reported correctly. Just remember that the loan has not been subject to taxation and HMRC will want what is owed. 

What happens when a director’s loan account is in credit?

If your director’s loan account is in credit, it indicates that the company owes you money. If your director’s loan account is in credit then you can withdraw this at any point and no additional tax is owed.

What happens when a director’s loan account is overdrawn?

If your director’s loan account is overdrawn, it indicates that you owe the company money. The balance overdrawn is judged as an interest-free loan, and it might need to be reported to HMRC for taxation and as a Benefit in Kind.

When do I pay tax on a director’s loan?

If your director’s loan account is overdrawn on your company’s year-end, you might need to pay tax on the money owed. No tax will be owed if the money has been repaid in full within nine months and one day of the company year-end date.

An additional Corporation Tax is applied to any money not paid back after this time period. The outstanding amount will be taxed at 32.5%. This is repayable to the company from HMRC once the director repays the outstanding amount. There may also be personal tax to pay on the outstanding amount, also at 32.5%. However, this is not repayable to the director from HMRC.

I owe the company more than £10,000…

If you owe the company over £10,000 on an interest-free loan, this loan is classified as a Benefit in Kind. It will need to be recorded on form P11D and it will be subject to both company and personal taxation. The company will also be required to pay 13.8% National Insurance (Class 1A) on the full amount owed.

The company owes me money…

The company does not need to pay any Corporation Tax on money borrowed from directors, and the director has the right to withdraw what is owed at any time. However, if a director charges interest on the loan to the company, the interest payments become a business expense for the company and must be declared as income for the director on their Self-Assessment return.

A word on “bed and breakfasting”

Directors were once able to manage their director loan accounts to avoid tax, known as bed and breakfasting. HMRC have since clamped down on these tactics with measures introduced to stop loopholes being used.

For example, a director could repay all of their loan just before the year-end date, and then take the whole loan out again just after the year-end date without a real intention of ever paying it back. But now, any loan over £10,000 repaid by the director triggers a 30-day blackout period where no further loans can be taken out. And if they are, the full loan is taxed.

This is just one example of the new rules, and other rules apply to even large loan amounts.