As the Director of a Limited Company, it is possible to owe your company money.
You’ll know that one of the benefits of being a limited company is that your business finances are entirely separate from your personal finances, so you’re protected from financial liability. But that doesn’t mean it’s impossible to take money out of the business if really necessary.
Anytime a Director takes money out of the business, we use a directors loan. Let’s look at what we mean by ‘really necessary’ so you can assess whether this could be a smart option for you.
A Directors Loan Account records all transactions between a Director and the company
This will be:
Money taken out of the company that isn’t a salary, dividend or expense repayment
When we’re talking about ‘money taken out of the company’ we’re talking about cash withdrawals, or personal expenses paid for using company money or a credit card.
Business expenses are any expenses that are incurred wholly, exclusively and necessarily in the performance of the duties of employment. If the expense fails this test then it is classed as a personal expense.
It is important to note for a company that is VAT registered, if any personal expenses are recorded in the directors loan account, the VAT on the receipt or invoice cannot be claimed.
Money a director pays into or loans the company.
At the end of the company’s financial year, either you will owe the company money or the company will owe you money.
A director’s loan is effectively an interest free loan to a director and can have complex tax implications if not repaid
It’s important to be aware that a director’s loan must be repaid within nine months and one day of the company’s year end or there will be heavy tax penalties.
At year end, profit permitting, a dividend is usually declared which will cover the balance on the director’s loan account, thereby effectively repaying the loan. If there are not sufficient profits, then a Director may have to consider repaying the loan.
A director’s loan of £10,000 or more is automatically treated as a benefit in kind and must be reported on your self assessment tax return.
It’s doable, but encourage alternatives where possible, so you don’t fall into a tax trap
Key points to factor in:
- If you need the money, ideally take it as dividends or an extra salary
- If it really is just a loan, repay it in plenty of time to avoid paying additional tax
Most commonly, Directors will use a Director’s loan for their own wages for the month. Typically their set salary is low, so this covers the extra over bit they need above their salary.
If clients have funds, sometimes they’ll take a temporary loan for a car repair, or an annual train ticket for travel that doesn’t fall under business expenses. They’ll either repay the loan down the line prior to their year end (to avoid the additional tax), or we’ll vote a dividend to cover this.
The problem is, it’s very easy to get in trouble by either not repaying the loan or not having enough to cover it with dividends. Either of these scenarios will end up with you having to pay extra tax – and nobody wants that!
We use a directors loan for anytime a director takes money out of the business to pay themselves (or take a loan from the company), and then at the end of the year we offset any payroll (if not taken out separately), plus any personal expenses not reimbursed, and vote dividends to clear the balance (assuming there is enough profit and reserves to do so!).
This can seem like complicated stuff, don’t be afraid to ask for specific advice
If you’re stuck deciding whether a Directors loan is the best option for your borrowing needs, or you’re unsure of how to do all the reporting stuff when it comes to your tax return, we can help. Drop us a line and tell us a little bit more about your situation.