Contractors' Questions: What is a director's loan and how do I take it out?
Contractor’s Question: My bookkeeper has said she doesn’t think I want to “get into” taking a director’s loan. I asked about this briefly because I heard from another limited company director that it can help with personal cashflow.
But I’m not sure what a director’s loan is and why she sounds so opposed to it. Annoyingly, she’s away on holiday so I now need to wait to hear back from her But if I did want to take a director’s loan, how would I arrange it; how much could I borrow and what’s the stigma?
Expert’s Answer: There shouldn’t be a stigma attached to taking a director’s loan from your company. Since 2007, private companies have been permitted to make loans to directors, providing shareholder approval is obtained and the company can still meet its financial obligations.
However, there may be negative tax implications and professional advice is usually needed in advance to avoid any unexpected tax bills. The tax implications will depend upon the amount of the loan; the duration of the loan and whether the company will be charging you interest.
The ‘S455 Charge’
If part of the loan remains outstanding nine months after company year end, there will be an S455 charge. This is calculated at 32.5% of the outstanding balance and is paid to HMRC by the company with your corporation tax.
Any overdrawn director accounts will count towards the balance of your director’s loan account. For example, if you were to have an overdrawn expenses account, this would contribute to the balance of your director’s loan account.
If you repay the director’s loan before the nine months has elapsed, you can adjust the corporation tax return showing the date the loan is repaid and remove the S455 charge or recalculate if it was only a partial repayment. However, this must be a genuine repayment of the loan. It is not permitted to repay the loan for the purposes of avoiding the S455 charge and then take another one out the following week or month!
If the loan remains outstanding, the S455 charge must be paid and will be refunded to the company once the loan had been repaid.
Director’s Loan as a ‘Benefit in Kind’
There are additional tax implications if the loan exceeds £10,000, so it’s worth confirming that this is the total of all balances owed from you to the company.
If the loan exceeds £10,000, HMRC will view this ‘cheap loan’ as an employment benefit. As with all employment benefits, this will need to be declared on a P11D form, and the value of the benefit will be calculated as the interest that should have been charged. This is calculated using the official rate of interest.
If any interest has been charged, this can be deducted from the cash value. For example, if there was a loan of £12,000 outstanding for a full tax year, and the official rate of interest is 2.5%, this would give a cash benefit of £300.
If interest had been charged by the business of £150, then the benefit to be declared would be £150. This would be the figure reported on the P11D and the Class 1 A liability to be paid by the company would be calculated at 13.8%, meaning a tax liability of £20.70.
This cash benefit would also be included on the director’s tax return as employment income and taxed at the appropriate rate. If interest was charged on the loan at the official rate, there would be no benefit to declare. There will also be no benefit in kind to calculate if the total aggregate of loans is below £10,000.
As you can see, taking a director’s loan is not always straightforward and this may explain your bookkeeper’s reluctance, as it requires thorough planning to minimise exposure to tax.
The expert was Joanne Harris, technical commercial manager at contractor accountancy firm Nixon Williams.