Bridging the gap

Directors’ loans and who can take one.

There are times in everybody’s life when we all need some extra finance. As a contractor you might find yourself between projects and need some extra money for living costs, or need the money to put towards a large purchase, a car for example.

There are many methods to receive a loan, such as through a bank or a virtual lender (an online company who deposit money straight into your account but who charge extortionate interest rates). If you operate through a limited company you might be able to borrow money from the company as a directors’ loan.

If you are thinking of taking a loan from your limited company, our article is a must read. It covers what a directors’ loan means, who can take one and what you need to consider when taking a loan.

What is a directors’ loan and who can take one?
A directors’ loan is when you get money from your company that isn’t: a salary, a dividend, a expense repayment or money you previously paid into or loaned the company”, according to .Gov website.

Important points to consider

There are a number of important things to consider when taking a directors’ loan. These include:

Tax Charges
If the loan is still outstanding 9 months and one day after the year end in which the loan was made, then S455 tax will be charged to the company at a rate of 32.5% on the outstanding loan. The S455 tax is refundable from HMRC 9 months after the year end in which the loan is repaid.

Benefit in Kind
The loan will be classed as a ‘Benefit in Kind’ if the interest charged annually to the borrower is less than 3.0% (HMRC’s official rate). To avoid this ‘Benefit in Kind’ and the tax and NI charge on the benefits, the borrower must pay 3.0% annual interest to the company.

The interest that the company receives will then be taxed at 20% (Corporation Tax) and the remaining balance will be retained profit for the company.

Something to note: If a cumulative loan account is less than £10k at all times in the accounting year then there is no benefit in kind charge.

Procedure and Documentation
If the loan or cumulative loans exceed £10,000 then shareholder approval is required with formal company resolutions. Approval must be received before the loan is paid. If not, HMRC could view it as a something else, for instance a dividend and dividend tax will need to be taken in consideration.

There might come a time when you feel the need to take a directors’ loan. For instance to bridge the gap between you when last received a salary and the next dividend payment. However, even though the loan is taken from your limited company this doesn’t give you flexibility with repaying it. Failure to properly plan the loans repayment could see you getting slapped with additional tax liabilities which could cost you a lot of extra money and stress.

If you are considering taking a loan from your limited company, it is extremely important to plan how and when you will be able to repay it. If the loan is still outstanding 9 months after the year end in which the loan was paid the company is charged 32.5% on the outstanding loan.

It is also important and strongly recommended not to take all the available money out of the company as sufficient funds will need to be retained to cover future tax liabilities and also potentially the additional S455 tax.

It is also worth noting that if a repayment was made and it was intended at the time of repayment to re-borrow the money, then the repayment will be ignored for deciding if the loan has been repaid within 9 months. However, if the repayment gives rise to a charge to income tax, for example repaid as a dividend or a salary bonus then the loan will be treated as repaid.

If you are considering taking a directors’ loan, you may find our guide; Directors’ Loan: Detailed Rules very useful.