Contractors' Questions: How to take a loan from my limited company?
Contractor’s Question: Drawing dividends and salary may suffice, but if I need to what is the best way to take a loan from my limited company? Is there a limit to what I can take out, and would my repayments incur interest?
Expert’s Answer: As a limited company contractor, any funds you withdraw from your company that are not in respect of salary, dividends or business expenses will be classed as a director’s loan. Before you go ahead and withdraw the money, it’s important to ensure that your company has sufficient funds to cover its other liabilities, such as corporation tax.
As a contractor, you are fully entitled to take a loan from your limited company but must gain shareholder approval beforehand. As most contractors are the sole shareholder in their company, this is generally something of a formality.
As to your final two questions, HMRC has strict rules around loans made to a director, and a tax charge will apply if the loan is not repaid within certain timescales (Editor's Note: As of April 2016, the rate of tax charged was increased due to an announcement at Budget 2016).
A director’s loan must be repaid within nine months and one day of the company’s year end.
For example, if you borrowed £8,000 on 15 May 2014, and your year end was 31 December 2014, then you would have until 1 October 2015 to repay the loan.
Any amount that is outstanding following this date would then be subject to corporation tax at a rate of 25% (before April 2016). The tax ‘charge’ can be reclaimed from HMRC, but only after the loan has been repaid to the company. If a loan is repaid over a number of years, the company will be able to reclaim part of the tax paid on its corporation tax return for the year.
From a personal tax perspective, the maximum amount you can borrow before incurring any income tax liability is £10,000. Once a director’s loan rises above this threshold, it is classed as a ‘benefit in kind’ and becomes subject to income tax. This charge can be eliminated by charging interest on the loan – the rate for 2014/15 being 3.25%.
In terms of repaying the loan, you can simply transfer money back into the company bank account, or credit the director’s loan account with a salary or dividend payment.
The expert was Richard Murray, head of operations at contractor accountancy firm ClearSky Accounting.
Editor’s Note: Further Reading –