The Director's Loan Account

Extracting profit via the Director's Loan Account means there is a tax implication, but you can get at that pot of money ...

What happens if a director just wants to borrow some cash? Directors will be pleased to know that the Companies Act currently permits such loans, but there are a number of tax and company law considerations to bear in mind.

The general rule is that when a company makes a loan to a director, it must seek the approval of its shareholders, although when the total lending to a particular director is less than £10,000, this is not strictly necessary.

I do recommend that such loans are documented so that they are not caught as 'pay'. HMRC quote in their manuals:

"If an employer and employee make an agreement under which the employer lends the employee money and the employee agrees to repay it at a future date or dates, the amount in question is a loan, not a payment on account of earnings.

For example, the Civil Service removal scheme may allow a transferred member of staff to draw an advance of salary. Here the proper construction of the arrangement is that the employee is getting a loan that is repaid by instalments out of future salary payments. PAYE is applied when the salary is paid. It does not apply when the advance is made."

The loan itself does not trigger a tax charge, but there are tax consequences for the period of time the loan is outstanding. A director will incur a benefit in kind charge on the loan (if it exceeds £10,000 at any time during the tax year), reportable on form P11D expenses and benefits.

A national interest charge is calculated using HMRC rates and the director pays tax on the resulting benefit in kind, and the company pays national insurance.

"However, to mitigate both the tax and national insurance, the director could pay interest to the company!"

In addition to the national insurance issues, the company will have a tax charge if the loan remains outstanding more than 9 months and 1 day after the end of the accounting period in which the loan is made.

Currently, the tax rate is 32.5%, but the good news is that if the director repays the loan this tax is repayable 9 months and 1 day after the end of the accounting period in which the loan is repaid. However, if a director decides not to repay the loan, the tax is not repayable.

A director may be minded to write the loan off under this scenario, but HMRC has specific anti-avoidance legislation to ensure that in this circumstance the director is charged tax as if it is a dividend and the company suffers an employer's national insurance charge.

If you feel inspired to find out more about anything I've said here, do call me on 0333 335 0453 or leave a comment below and I'll be in touch as soon as I can.