Director’s loans explained: A complete guide for limited company directors

Director’s Loans remain one of the most underused and misunderstood areas of running a limited company. Whether as a limited company director you’re navigating your way through unexpected personal expenses, you’re managing your cash flow, or perhaps you’re just trying to remain compliant, it’s essential to understand how Director’s Loans work. 

In this blog we take a look at the rules, tax implications, risks and best practices, to help you understand Director’s Loans, and how to remain on the right side of HMRC.

• All information relating to your Director’s Loans must be recorded correctly in your Director’s Loan Account (DLA) 

• If you don’t repay the loan within nine months of your company’s year-end you may trigger Section 455 tax (35.75%) 

• Loans which total a value of over £10,000 can become a Benefit in Kind (BiK), which will create further tax liabilities 

• HMRC closely monitors DLAs that become overdrawn, especially if it happens regularly or avoidance behaviour is detected 

Essentially a Director’s Loan is money you withdraw from your limited company that isn’t in the form of a dividend, salary, or an expense repayment. Legally, company funds belong to the business, and therefore any personal withdrawals must be recorded correctly within your Director’s Loan Account. 

An Aardvark Accounting client withdrew £8,000 from their limited company, believing that it was their money and it therefore wasn’t correctly recorded. At year-end their Director’s Loan account was overdrawn and therefore triggered Section 455 tax charge of 35.75%. 

With guidance from their Aardvark Client Director, they were able to repay the loan amount back into their company using their available dividends before the ninth month deadline, which in turn enabled them to avoid the tax bill entirely. This case demonstrates how early advice can help to prevent expensive mistakes further down the line. 

Your Director’s Loan Account (DLA) works by recording all your non-salary, non-dividend transactions between yourself and your company. It can either show:

• if your company owes you money (you’ve put personal funds in)

• if you owe the company money (you’ve taken funds out)

Common entries include:

• Cash withdrawals

• Company funds used to pay for personal expenses

• The reimbursement of personal money that has been used for business purposes

Key points

• Avoid paying for your personal expenses with company money, as this can create messy accounts and potential future tax issues

• Only pay for legitimate business expenses with your company’s account

• Document all personal withdrawals to avoid any scrutiny from HMRC

There are specific steps and procedures you need to follow when taking a Director’s Loan.

Repayment deadline

To avoid paying S455 tax, any loan taken during the company year, must be repaid within 9 months of the company year-end.

Tax implications and Section 455

If you miss the deadline and your Director’s Loan Account is overdrawn, HMRC will charge Section 455 tax at 35.75% on the outstanding balance.

For example: You take a loan of £6,000 and don’t repay it by the deadline – Section 455 tax is applied at 35.75% = £2,145 is therefore owed in additional tax.

If you repay the loan, S455 can be reclaimed, as you don’t have to repay the amount to claim back some of the tax paid. You won’t be eligible to request the refund until the filing deadline of the company year in which the transaction falls.

Benefit in Kind (BiK) rules

Director’s Loans can become BiKs if:

• They exceed £10,000

• No interest is charged

• If interest that is charged is below HMRC’s official rate

This will then trigger:

• P11D reporting

• Class 1A National Insurance

• Personal Income Tax on the cash equivalent value

Interest:

If the loan exceeds £10,000 and is repaid to the company alongside interest at HMRC’s official rate, this will remove the requirement to complete a P11D or pay the associated tax.

Director’s Loans can be a fantastic solution to solve short-term cashflow needs, and can provide reassurance, but it’s important to understand the strict rules they come with and significant tax implications if abused. Prior to withdrawing any funds from your limited company, ensure you get in touch with your Aardvark Accounting Client Director to discuss your plans, and understand how to act compliantly and remain protected. 

If funds are taken from the company as a DLA, it’s likely these funds may need to be set aside for other company taxes such as VAT, PAYE or CT.  Therefore, you’ll need to make sure that as a result you still have the necessary cash flow to pay the taxes as and when they become due. Seek advice from your Client Director, alongside planning the best way to use the DLA and understand the timelines. 

If you’re on the lookout for personalised advice on Director’s Loans, tax planning, or managing your Director’s Loan Account, get in touch with Aardvark Accounting to discuss how we’re able to help you and your limited company be a success.