What is a director loan?
Also known as a director loan account or simply a DLA, it is a loan between the director and their company. The company can either owe money to the director (e.g. the director has paid for business expenses personally or the director has injected funds into the business) or the director owes the company money (e.g. money is taken from the company that is not or cannot be treated as dividends or a salary). There is no issue when the company owes money to the company but there are rules you must adhere to if you owe the company money. These rules are explained below.
Rule 1 - s.455 tax
If at the end of the Company’s Corporation Tax period the Director still owes the Company money, you have two options:
Repay the director loan to the company within 9 months of the corporation tax period end (e.g. for a corporation tax period ended 31 December 2000, the loan must be repaid before 30 September 2021).
Submit your corporation tax return showing that your director loan account won’t be repaid within 9 months. This creates a tax charge from HMRC called section 455 (s.455) Tax which is currently at a rate of 33.75% (the rate at which dividends are taxed at higher rate) of the loan value and is due to be paid by the Company to HMRC (e.g. s.455 tax of £6,750 is payable on a loan totalling £20,000). HMRC will then hold this s.455 tax amount until the loan has been repaid. Interest will be accrued for everyday the s455 tax hasn’t been paid to HMRC after the 9 month window. There is also an additional monthly accountancy fee payable (currently £40+VAT/month) in order to provide additional advice and reclaim any s.455 tax that you pay to HMRC. When the loan is finally repaid to the Company, we will be able to reclaim the s.455 tax charge by submitting your next corporation tax return and filing a L2P form which can take a while to be processed by HMRC. Please also be aware that any s.455 tax paid to HMRC must be reclaimed within 4 years.
We would therefore suggest paying back your director loan within 9 months of the period end to avoid paying s.455 tax and paying additional accountancy fees!
Rule 2 - benefit in kind
If the Director’s Loan Account is greater than £10,000 at any point, it is considered to be a benefit to you and so you have two options:
Pay interest to the company personally at the beneficial loan interest rate - by doing this you haven’t received a benefit.
You don’t pay any interest but will need to report the beneficial loan interest amount on a P11D as a benefit in kind. You would then be taxed personally on this and the company would need to pay Class 1A National Insurance payments.
We would suggest paying interest to the company personally as this will save you having to add the loan to your P11D, potentially paying more accountancy fees, paying personal tax on the benefit in kind and the company having to pay class 1A NI.
Other Considerations
It would also be considered a director loan if a company loans money to a directors’ close family member - this loan would be treated as if it were lent to the director.
If you are thinking about taking a large sum of money out of the business, please contact us so we can help you evaluate all the options open to you, identify the most tax efficient method and help you decide the best way to proceed.
HMRC Guidance
Director loan accounts: www.gov.uk/directors-loans
L2P form that needs to be filled out to reclaim any s455 Tax that has been paid: https://public-online.hmrc.gov.uk/lc/content/xfaforms/profiles/forms.html?contentRoot=repository:/Applications/IndirectTax/1.0/L2P&template=L2P.xdp