Director’s loans – A missed tax planning opportunity?
Understanding Director’s Loans
A director’s loan is a way to take money from your company without using salaries, dividends, or expenses. It’s a popular method for accessing funds tied up in your business without incurring immediate personal tax costs, but planning is essential.
Personal Tax
- Income Tax: Generally, you don’t pay Income Tax on director’s loans because the tax responsibility lies with your company. However, if the loan isn’t repaid, you must report it and pay Income Tax through Self-Assessment. Your company also needs to handle Class 1 National Insurance for loans of £10,000 or more. Orchard Accountants provides a self-assessment service to help simplify the process.
- Benefits: Loans over £10,000 and interest-free ones may be seen as a benefit and could lead to extra personal tax costs. These loans must be reported, and Class 1 National Insurance should be deducted by the company.
Business Tax
- Corporation Tax: If your company is closely controlled by a few people, a director’s loan may incur Corporation Tax. To avoid this, repay the loan within nine months of your accounting year-end. If repaid in time, the company can reclaim the Corporation Tax. Loans over £5,000 or £15,000 might attract Corporation Tax at 33.75% if not repaid promptly. Our expert team provide a dedicated service for corporation tax.
Compliance
- Record-Keeping: Maintain a director’s loan account to track all transactions and ensure compliance with regulations. HMRC can request information on these loans at any time, so keep detailed and updated records of all withdrawals, repayments, and taxes.
Need help with director’s loans or financial planning? Contact our team today for advice.
