If you’re a director of a limited company, can you borrow money from your company? The simple answer is yes, however, there are a number of things to consider before doing so, in particular, tax implications and pressures on cash flow.
If a Director, or a Shareholder or person “connected” with the directors, receives money from the company that hasn’t been declared as either salary or dividend income, you are classed as having an overdrawn director’s loan account. If this money is repaid in full within nine months of your company year end then you avoid paying Corporation Tax on the money.
However, if the money is outstanding 9 months after your year-end, additional Corporation Tax will be payable at 32.5% of the outstanding amount.
HMRC holds this money until the loan has been repaid after which time, you can reclaim the tax paid. Bear in mind that you can only claim the tax back 9 months and one day after the end of the account period in which the loan was repaid.
Example: if the loan is repaid in an accounting period ending on 31st March, the company cannot reclaim the tax until the 1st January the following year.
If your Loan is more than £10,000
If your Directors Loan Account is overdrawn by over £10,000, then you will need to pay the company interest on the outstanding amount at a rate recommended by HMRC. If you are not paying interest, your company must treat the loan as a “benefit in kind”.
Tax is payable on a benefit in kind. The Director/Shareholder will need to pay Income Tax and the company will pay Class 1A National Insurance. The benefit also needs to be reported to HMRC on an annual P11d form.
Disclosure and Cashflow
Bear in mind that any loans will have an impact on the company’s cash flow. This means that there is less money available for investment and the company may need to borrow money from elsewhere, which may incur interest payments.
In addition, any overdrawn directors loan accounts need to be disclosed in the company’s accounts at year end. These accounts are on public record at Companies House, available for anyone to review.
The HB team is here to help with all your tax, cash flow and accounting questions and can help you make your money work harder for you and your business. If you would like to talk about how we can help you and your business, please feel free to contact the team on 01992 444466. We’re accountants for business and we’re here to help you survive and grow.
The information contained above is for general guidance purposes only. Whilst every effort has been made to ensure the contents are accurate, please note that each individual has different circumstances and it is essential that you seek appropriate professional advice before you act on any of the information contained herein. HB Accountants can accept no liability for any errors or omission or for any person acting on or refraining from acting on the information provided in the above
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