What is a director's loan account?
It's a running tally of money that moves between you and your company that isn't your wages, a dividend, or you being paid back for something you bought for the business.
Two things can happen. If you take money out that isn't pay or a dividend, the company has lent it to you, so you owe the company. People call that an overdrawn loan. If you put your own money in, the company owes you. Most of the tax worth knowing about lands on the first one: when you owe the company.
You don't need a fancy loan agreement for this to count. Taking cash out "to sort out later", or your business card paying for something personal, can both end up here.
Why does the company owe extra tax if I owe it money?
This is the big one, so here it is plainly. If you still owe the company money at your year-end, you have 9 months from that date to pay it back. Miss that, and the company has to pay an extra slice of Corporation Tax: 33.75% of whatever you still owe.
The good news: it's not gone for good. Once you pay the loan back, the company can claim that tax back from HMRC. So it works like a deposit you get returned, not a fine. But the refund is not instant. You can't claim it the day you repay. The claim only becomes due 9 months and a day after the end of the company's year in which you paid the loan back, so it can be well over a year between repaying and the money coming back. The company is out of pocket the whole time, and there's a deadline (four years) to claim it, so it's not something to leave drifting.
So the simple rule: pay yourself back within 9 months of your year-end and this extra tax never happens in the first place.
One important catch: you can't game the timing. You might think you could repay the loan a few days before the deadline, then take the same money straight back out. You can't. If you pay back £5,000 or more and borrow a similar amount again within 30 days, HMRC treats it as if you never repaid, and the extra tax still applies. There's a second version for bigger sums: if you owed £15,000 or more and you'd already lined up taking it back out when you repaid, the same thing happens, and that one has no time limit at all. The only safe way to clear the tax is to actually pay the money back and leave it paid. (Don't worry about the detail. When we spot a director's loan, we check the timing for you so you don't trip over this.)
What if I borrow more than £10,000?
There's a second thing that bites on bigger loans. If you owe the company more than £10,000 at any point in the year, even for a single day, the loan counts as a perk you've had from the company, a bit like a company car.
A perk like that is taxable. To avoid it, you pay the company interest on the loan at HMRC's set rate, which is 3.75% a year at the time of writing. (HMRC reviews that rate every few months and can change it, so check the current figure when you do this.) Charge yourself at least the set rate, and there's nothing extra to pay. Charge yourself less (or nothing), and the gap is treated as taxable, has to be reported to HMRC on a form, and the company pays National Insurance on it.
It's the £10,000 at any moment part that catches people out, not where you end the year. Dip over ten grand in the summer and back under by Christmas, and it still counts.
A worked example, in real pounds
Say your company's year ends on 31 March. During the year you took out £15,000 that wasn't wages or a dividend, and by the year-end you still owed £12,000 of it.
- You have until 31 December (9 months after 31 March) to pay that £12,000 back.
- You don't manage it in time. So the company pays extra Corporation Tax of 33.75% of £12,000 = £4,050.
- Because you also went over £10,000 during the year, you either pay the company interest at 3.75%, or the cheap loan gets reported as a perk and taxed.
- Later, you finally repay the £12,000. The company can then claim back that £4,050, but not straight away: the claim is only due 9 months and a day after the end of the company year in which you repaid. So if you clear it during the next year (ending 31 March), the £4,050 isn't claimable until the following 1 January. The money comes back, just not on the day you pay the loan off.
Pay the £12,000 back before that first 31 December instead, and none of the £4,050 ever happens. Same money, very different tax, decided purely by timing. And no, you can't repay it on 30 December and take it straight back out in January, the repay-and-redraw rules above stop that.
How is this different from a salary or a dividend?
These get mixed up, so here's the line between them.
- Salary is pay you run through payroll. It's a cost to the company and it's yours to keep.
- A dividend is a share of the profit the company has left after tax. It's yours to keep too.
- A director's loan is borrowed money. It isn't yours, it has to come back, and if it doesn't come back in time the tax above kicks in.
Taking money out as a loan isn't wrong, lots of directors do it between paydays. It just has a clock on it that salary and dividends don't.
How SimpleReturns handles it
When we go through your year's money in and out, we spot the amounts that look like a director's loan and ask you about them. If you owe the company at the year-end, we work out whether the extra tax applies, show you the figure, and tell you what paying it back in time would save, before anything is filed. You don't have to know any of the rules above to get it right.