Did your annual accounts reveal that you have a director’s loan to repay? Wondering what that actually is? Don’t worry - it may turn out that the matter is not as serious as it looks and you don’t have that much to pay.
Summary & key takeaways
- A director's loan is company money spent on the director's private needs.
- Transfers that are neither salary nor dividend go to the director's loan account.
- The loan must be repaid within 9 months and 1 day of the financial year end.
- A loan not settled on time incurs tax of 32.5% on the amount.
- Above £10,000, 3% interest and Class 1 National Insurance also apply.
A director’s loan is money taken from the company account for transactions unrelated to the business. It is recorded in the director’s loan account and treated as spending for private purposes, such as shopping or private travel. What is a director’s account? It is a bank account or simply an accounting record with the history and type of loans made. If a transfer from the company account is not salary or a dividend, it is treated as borrowing money from the company through a director’s loan. Similarly, if documents are missing for a transaction or an expense cannot be accepted, it is recorded in the director’s loan account.
How do you safely transfer money to your private account?
It is best to set a salary amount that can be transferred every month. Another option is to take money out as a dividend. That way it will not be recorded as a loan.
Sometimes you need to transfer money into the company account, if revenue is weak and the business needs financial support. When you pay money into the company account or buy something for the business with your own money, you are making a loan to the company. It will be recorded in the director’s loan account and you will be able to take it back at any time, provided the company has sufficient funds.
How do you repay a director’s loan?
If you take out a director’s loan, you must repay it within nine months and one day of the end of the company’s financial year. If it is not settled on time, it has to be recorded in the tax return and tax of 32.5% has to be paid on the amount.
If the loan exceeds £10,000, you also have to pay interest of 3%. The company must also calculate Class 1 National Insurance contributions and pay them to HMRC. This amount must be shown in the company’s annual accounts. You do not have to pay any contributions or interest if you stay under £10,000, or if you make a loan to an employee for a fixed term and it carries interest at a rate equal to or higher than the rate set by HMRC for the given tax year.
Is it worth it?
To sum up, a director’s loan is nothing to be afraid of. You just need to remember to repay it on time and preferably not exceed £10,000. What matters, though, is that the company’s money does not belong directly to you and should be used for transactions related to the business.
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