What Is A Director’s Loan?

If you’re a director in a limited company, you may be eligible for a director’s loan. These financial tools are a great way for a company to invest in its leaders.

Whether for personal or business reasons, a director's loan can provide directors with the financial support they need to succeed. But how do they work?

Let’s look at what director’s loans are, the tax in-and-outs and other key information you’ll need when taking one out.

What is a director’s loan?

A director’s loan is when company funds are loaned to one of its directors rather than being paid as a salary, dividend or other payment. The loan can be for personal or business reasons.

Any director’s loan needs to be repaid, so a loan agreement with payment terms and interest rates will usually be drawn up in advance of the money being borrowed. A director’s loan can go the other way, too - you can loan the company money, and it pays you back with interest as agreed.

There might be restrictions on taking out director loans depending on the company’s articles of association, so be sure to know your stuff before taking the plunge.

Do I need to pay tax on a director’s loan?

A director’s loan can be taxable, so prepare your tax bill accordingly! How much tax you need to pay depends on your income and tax bracket.

If the loan is over £10,000 or you’re paying a discounted interest rate, these are both considered ‘benefits in kind’. You should add the loan and any interest to your Self Assessment tax return to keep HMRC in the loop.

The company will also need to deduct Class 1 National Insurance contributions if the loan exceeds £10,000. Your accountant can help with these calculations.

If you’ve loaned the company money, any interest paid to you counts as personal income and must be recorded on your tax return.

Director’s loan need-to-knows

Now you’ve got the basics down, here are some other details about director’s loans that will help to keep you and your company on the right side of the rules and regulations.

Director’s loan account

While not compulsory, setting up a dedicated account to track when repayments are coming back to the company is an easy way to keep on top of repayments. We’d highly recommend setting one up.

Balance sheet

Any director’s loan needs to be marked on the company’s balance sheet as a liability. This is so HMRC is aware of the loan when it’s time to submit accounts.

Corporation tax

The good news is the company can claim back corporation tax once the loan is repaid or written off. Ask your accountant how best to do this, as there are some tricky details about claiming it back before and after two years.

Non-repayment

The company reserves the right to take legal action if a loan isn’t paid back according to the agreed terms. If the loan is not repaid and the company is wound up, the loan may become an unsecured debt and may not be repaid in full.

Wrapping up

Whether you’re a director in need of financial support or you’re just curious about what a director’s loan is, it can be a great solution for the director and company alike.

Feeling confused? Don’t suffer in silence - BXD Accounting can help with all your accounting needs.