A director’s loan in a limited company is a hot topic among directors and the bane of many accountants. All LTD company directors must maintain a financial separation between the firm’s budget and personal assets. In the event of a future HMRC audit, having a transparent financial flow is critical. Unfortunately, experience has shown that maintaining this distinction is not always simple. Many directors don’t actually know how does a director’s loan work. The Director’s Loan occurs when you use corporate funds for objectives that are not directly relevant to your business.
In this article we will answer a few most common questions:
- Can a director borrow money from his company?
- Is it worth taking a director’s loan?
- What conditions apply to a director’s loan?
- What should you keep in mind to avoid incurring unnecessary fees for yourself and your company?
- Do you have to pay back a director’s loan?
What is a director’s loan?
Regular loans from various financial sources may come to mind when you hear about a director’s loan, i.e., a limited company loan. However, a Director’s Loan is something entirely different. In reality, the term “loan” is overused in this case. Why?
Because a Director’s Loan is any sum from the company’s budget that hasn’t been used for a business-related purpose. An expense like this does not always have to be planned. Assume you pay for your personal purchases with a company card by accident. This is sufficient to classify the amount spent as a director’s loan.
As a result, no applications or other procedures are required. The Director’s Loan refers to any personal expenses paid out of the corporate budget. That is why it is critical to keep a close eye on your finances. You will avoid the dilemma of mistakenly “taking” a loan as a result of this.
Ltd director’s loan – does HMRC monitor it?
Of course! HMRC keeps an eye on businesses and maintains control over those that disobey the law. HMRC can monitor the cash flow between you and your company if you are under inspection. You have the right to receive business money in the form of dividends and salary as a limited company director. However, all expenses not falling within these categories will be covered by the Director Loan. Remember that if you, as a director, consistently exceed HMRC’s loan limit during your audit, HMRC may decide that the funds are a salary rather than a loan. As a result, you will be responsible for any taxes and national insurance contributions due on this sum. It’s important to keep a close eye on this and try not to go over the £10,000 limit. Simply, make sure you are never late with the director’s loan repayment and you should be fine!
Limited company liquidation and director’s loan
You should be aware that borrowing too much money from the company might have a substantial negative impact on its smooth running. As a result of irresponsible practices, there may not be enough funds to pay off your creditors. Another outcome could be the limited company liquidation and the director who was reckless in his actions may face serious consequences.
What are the terms of the director’s loan?
The director’s loan does not violate any regulations and so a limited company director can make use of the available capital. However, there are specific criteria you must meet.
What is the interest rate on directors’ loans?
First and foremost, you must always pay off your debts. In this case, it simply means returning borrowed money to your company’s budget, however, there’s a catch. Currently, the interest on a director’s loan is 2.25% on all borrowings and it must be applied to all financial commitments of limited companies.
Otherwise, governing bodies may consider this as a benefit in kind. This term is used by HMRC to indicate all of the benefits that the company’s owner receives from its operations. The bad news is that all the benefits in kind are liable to specific premiums increase. As a result, there might be a considerable rise in tax liabilities.
Director’s loan over £10 000 – what do you need to remember?
The two significant elements to consider while paying off a director’s loan are the repayment of the loan and the applicable interest rates, but there are a few more factors to take into account.
One of them is the director’s loan limit which is currently set at £10 000. Of course, you can withdraw large sums from your company’s budget, however, they will be considered as benefits in kind. Therefore, HMRC may require you to pay more. If you must utilise corporate funds, directors’ loans of less than £10 000 would be a better option.
The duration of the director’s loan
Another important factor is the repayment of the debt. It’s preferable to repay a director’s loan within 9 months and one day after the end of the company’s tax year. If you don’t, your company will have to post it on its tax return. Because the Director’s Loan is taxed at 33.75% by HMRC, it’s not financially viable. Only early repayment will keep your business from having to pay the tax on the director’s loan.
What happens when you loan money to your company?
It’s fairly common that as the director you loan money to your company to help to support its growth, therefore, it’s important to keep a few things in mind.
Firstly, the money you loan for business expansion will not be subject to limited company Corporation Tax. Secondly, you will be able to charge interest on the money lent to your company. You must include the interest you earn in your Self-Assessment settlement since it’s considered income. The accumulated interest will be recognized as a corporate expenditure.
Director’s loan – summary
The property of the limited company’s director and the company’s capital must be kept separate. As a result, if you spend company funds for personal reasons, the amount spent is considered a Director’s Loan. It will then be your responsibility to repay the director’s loan. . If you pay it off within nine months, you won’t have to report it on your tax return. Furthermore, the director’s loan should be no more than £ 10,000, otherwise, HMRC may conclude that you received benefits in kind and so you must tread very carefully while dealing with corporate finances.
If, at the end of this article you still have questions regarding limited company debt, give us a call and we will be happy to help!