Directors Loan - Is It Dependent On It's Purpose?

**SueEllen** · 28 July 2011, 13:50

If you do a search you will find out the primary purpose of a directors loan is for you to lend the company money not the other way round.

If you do want to take one you need to be careful that you don't take over £5,000 which can be easy if you take too many dividends.

In reply to your questions:
1. No
2. Yes

**craig1** · 28 July 2011, 14:20

Originally posted by graeme86 View Post

I'm looking to clarify wither taking a director's loan (say £4999) is conditional on the purpose of the loan and the financial situation of my company.

I will be beginning my first contract in the next couple of weeks. I have already earned around £22k this year from my full time job which I will be leaving and have been recommended by my accountant to take no salary for the remainder of the tax year and instead only take dividends up to the lower tax threshold.

I'm not sure wither this will give me enough cash to fulfil my personal financial commitments. I therefore would like to take a directors loan from the company - which I would repay on on April 2nd 2012 - of £4999 to avoid having to extract dividends at the higher tax rate and carry me over to 2012.

My 2 questions:

1. Would HMRC have a problem with this given I would have sufficient funds to take dividends?
2. If I repaid the loan with a dividend would the amount repaid contribute towards my total personal taxable income for the year?

Thanks,
Graeme

Don't get too held up on the higher tax band issue. If you need to go over it and there are good reasons to do so then just do it. Remember, any money you leave in the company for THIS tax year will still be there and count against the NEXT tax year if you take it out meaning you get to the absurd situation I've seen of some contractors having six figure sums floating around in their companies doing nothing.

Qualifier: discuss your personal circumstances with your accountant if you're going to do that.

In all the years I've been contracting, I've tried to avoid going into the higher band but I like my expensive creature comforts too much to restrict my income just to save a few extra beans of tax money.

**JamJarST** · 28 July 2011, 15:28

Originally posted by craig1 View Post

Don't get too held up on the higher tax band issue. If you need to go over it and there are good reasons to do so then just do it. Remember, any money you leave in the company for THIS tax year will still be there and count against the NEXT tax year if you take it out meaning you get to the absurd situation I've seen of some contractors having six figure sums floating around in their companies doing nothing.

Qualifier: discuss your personal circumstances with your accountant if you're going to do that.

In all the years I've been contracting, I've tried to avoid going into the higher band but I like my expensive creature comforts too much to restrict my income just to save a few extra beans of tax money.

WHS, if you can build up a warchest don't live like a pauper just to avoid paying more tax, why work so hard if you are not going to use the money.

**Cr1spy** · 28 July 2011, 15:33

Originally posted by SueEllen View Post

the primary purpose of a directors loan is for you to lend the company money not the other way round.

I thought this was the otherway around. Company lends the director money?

**Old Greg** · 28 July 2011, 15:50

Originally posted by craig1 View Post

Don't get too held up on the higher tax band issue. If you need to go over it and there are good reasons to do so then just do it. Remember, any money you leave in the company for THIS tax year will still be there and count against the NEXT tax year if you take it out meaning you get to the absurd situation I've seen of some contractors having six figure sums floating around in their companies doing nothing.

Qualifier: discuss your personal circumstances with your accountant if you're going to do that.

In all the years I've been contracting, I've tried to avoid going into the higher band but I like my expensive creature comforts too much to restrict my income just to save a few extra beans of tax money.

If you receive child benefit then going over the threshold is more of an issue.

**psychocandy** · 28 July 2011, 16:29

Have they changed this now? i.e. Go into upper tax rate and no child benefit?

**eek** · 28 July 2011, 19:17

Originally posted by psychocandy View Post

Have they changed this now? i.e. Go into upper tax rate and no child benefit?

The no child benefit for higher tax payers is from April 2013. It's one reason why I returned to contracting.

**imightbewrong** · 28 July 2011, 19:23

You can borrow £5K interest-free indefinitely.
You can borrow as much as you like without needing to register it as a BIK as long as:

- You pay a commercial rate of interest on the loan (set by HMRC, currently minimum is 4% I think)
- You pay it all back by nine months after the company year-end the loan is taken out in

The company will pay corporation tax on the revenue from the income of course, so that's 21% of 4%

**craig1** · 28 July 2011, 20:48

Originally posted by Old Greg View Post

If you receive child benefit then going over the threshold is more of an issue.

Being a true contractor, as is my wife, we have no children as they're a commitment that makes a permie job seem reasonable. We both decided a long time ago that we're far too selfish to ruin our lives having even one of the horrendous little money sucking snot-monsters.

Also, if you're earning enough that you willingly go into the 40% bracket then losing £20 child benefit in a week is not going to change your mind.

Directors Loan - Is It Dependent On It's Purpose?