Limited Company Directors Loans - FAQs
What are Directors Loans?
There are several methods that a director can pay themselves from a limited company, this includes;
- PAYE Payroll
- Dividends (paid to shareholding directors only)
- Directors Loans
Directors Loans can be made up of;
- Direct payments to or from the limited company by a director
- Personal expenses paid from the business account
- Business expenses paid from the directors personal account
The above transactions build up a directors loan balance, this can either be owed by the company to a director or owed by a director to the company.
Why would a limited company director want to take a directors loan?
Directors loans can be a useful method of transferring funds into a company when it is first formed to cover initial expenses. There may be insufficient sales into the business account initially to cover all business expenses.
As a directors loan balance builds up (monies owed by the company to a director) this balance can be repaid tax free to the director and is not included on their directors personal self-assessment tax return.
When would a director need to pay tax on directors loans?
Directors loans owed by a limited company to a director are tax free.
However, directors loans owed by the director to a limited company can incur tax in certain circumstances. Where less than £10,000 is owed by a director to a limited company, provided this in paid back to the company within nine months of its accounting year end no tax is applicable.
Where more than £10,000 is borrowed by a director or where repayment isn't made S455 tax is applicable. This is applied at 32.5% in the limited companies corporation tax return.
Does a record need to be kept of directors loans?
Yes. It is important to have a clear audit trail of directors loans.
The directors loan balance at accounting year end will be included as part of a limited companies statutory accounts filed with Companies House.
Are there any limits on how much a director could borrow from a limited company?
When a loan in excess of £10,000 is repaid by a director, no further loan over this amount can be withdrawn within 30 days.
This is a method sometimes used by directors to avoid tax by repaying their borrowed money to a company before the accounting year end to avoid penalties, only to immediately take it out again without any real intention of paying the loan back.
When this happens, the view of HMRC is that the director doesn’t intend to pay the money back and the full amount will automatically be taxed.
Can Directors Loans be written off?
Yes, however there are tax and accounting implications that need to be considered.
I recommend getting the professional advice of an accountant when considering this as there are a number of factors to consider.
Do HMRC monitor Directors Loans?
HMRC will monitor directors loans made to company directors (overdrawn) via the limited companies corporation tax returns.
Overdrawn directors loans can be considered by HMRC as a salary in some circumstances with PAYE deducted accordingly.
My recommendation is to always keep overdrawn directors loans to a minimum and always below the £10,000 S455 tax threshold.