How to borrow from your limited company, and what it means for your tax bill

If you are a limited company director, you may be considering borrowing money from your company to help with personal finances. While this can be a convenient way to access funds, it is important to be aware of the potential tax implications.

Taking a Director’s Loan

You can take money out of your Limited Company in the form of a Director’s Loan to return funds to your firm, borrow more money from your firm than you paid in the first place, or recover whatever funds you initially invested in the firm. A Director’s Loan Account, which must be included in your company’s balance statement, must be kept and maintained as a record of Director’s Loans.

It’s worth remembering that if you take out more money than has been put into your business, your Director’s Loan Account will become overdrawn, which will result in tax consequences. If your firm owes you money, your loan account will be in credit, allowing you to withdraw funds without incurring any tax obligations.

If the amount you owe your firm is less than £10,000, for example:

There are no personal tax responsibilities, but your corporation may face tax implications if your loan has been overdrawn for more than 9 months after the conclusion of your company’s fiscal year (your companies filing deadline). If this is the case, the corporation is responsible for paying Section 455 Tax on the whole overdraft.

Section 455 Tax is a 33.75% tax charge (32.5% for loans made before April 6, 2022), which your firm must pay in addition to its Corporation Tax due.

Any outstanding loan amounts must be shown on your company’s tax return.

If the amount you owe your company at any stage exceeds £10,000:

If your loan is overdrawn for more than 9 months after the end of your fiscal year, your firm may face tax repercussions in addition to everything set out above for loans of less-than £10,000.

If you return a Director’s Loan to the business with interest (at HMRC’s official rate of interest) when it exceeds £10,000, the loan will not be classified as a taxable benefit.

You must mention the loan on your business’s P11D and your Self-Assessment Tax Return if the loan is not returned to the firm with interest. This is because the Director receiving an interest-free loan from the firm is considered a benefit in kind.

The benefit’s value will be computed using the official interest rate. Your company will then pay 15.05% Class 1A national insurance via form P11D, and the benefit will be included in your personal tax return, taxed at your appropriate rate.

When it comes to Director’s Loans, there are a few things you should keep track of:

The amount of money a director contributes to the firm, less any share payments they may get.

The maximum amount of money a director can borrow from the firm.

Any loan-related interest that may be due

Traditionally, these documents are held in the Director’s Loan Account. Because the amount borrowed may be subject to different sorts of taxes depending on how much is borrowed, it’s a good idea to talk to your accountant about your intentions before borrowing money from your Limited Company.

Director’s Loan Account balance: nil or credit

You’re not borrowing any money if the amount you take out is less than the total sum you’ve put in; instead, you’re claiming cash that you’ve already paid in.

Depending on the total amount you withdraw, the Director’s Loan Account will either show a nil balance or stay in credit. As long as your account is in credit, you can withdraw the available funds at any moment without incurring any tax consequences.

However, if you withdraw more than what’s currently in there (after deducting a salary payment, dividend, or cost), it’s considered a benefit and hence a Director’s Loan. Your Director’s Loan Account will be overdrawn as a result of this.

Asking for help

If you’re considering taking a Director’s Loan from your limited company – or if you want to explore any of the other ways in which you can draw money (salary, dividends, or expenses) – contact JW Hinks on 0121 456 0190. Our friendly team of experts can help ensure you are doing the best for yourself and your business without accruing unnecessary tax obligations.