The Director's Loan explained

Posted 25/06/2019

A limited company is, legally, a separate entity from the directors. It has its own bank account, any purchases of assets and loans for the company must be taken in the company name. As such, ideally, any expenses incurred by the company for business use should go against the company bank, and the directors should make any personal expenses out of their own pocket. Even though this can be followed strictly, there may be a situation where you are forced to use the company card, such as a case where the personal bank card had been left at home by accident. In this case, a loan from the company to the director is created.

Any items paid for a director’s personal expense from the business creates a Director’s Loan. This loan’s transactions are reflected in the bookkeeping and annual accounts as a liability. A direct transfer from the company bank account to the director as a top up on their personal account will also count as a loan to the director.Business claims, such as the use of home as office or mileage, can be claimed from the director to reduce the loan they owe. If any businesses expenses are purchased through a director’s personal account or cash, then this will also decrease the loan. Declared dividends will also bring the loan down, but the director must bear in mind that any dividends over £2,000 would need to be taxed at 7.5% at the basic rate.

The loan does of course work in the opposite way. If the director paid for much of the business’ expenses through personal accounts, then the company owes the director this money and the director can pay this money back to themselves if the company has enough funds.

If the loan owed to the company is not repaid within 9 months of the accounting period it was withdrawn in then S455 tax will be due on what is outstanding. This tax is calculated at 32.5% of what is owed. S455 tax is a temporary tax in that it can be reclaimed once the loan has been repaid in full.
For example, a company’s year-end is March 2019. The loan is withdrawn from the company bank in February 2019. The director has until the end of December 2019 to repay the loan to the company to avoid the S455 tax charge. If the director takes out a new loan on top of the existing loan then he would need to ensure he doesn’t take any money out again for a few months. In these cases, HMRC state that they will only consider a loan as being repaid after a considerable amount of time has passed.
The loan can be written off; in these cases, this would need to be declared on the director’s self-assessment tax return, and taxes would be calculated when the P11D is prepared the next April.

Tags: director's loan, S455 tax, annual accounts, limited company