Source of funds for paying back a Directors loan?

Mell2086

Hi, I am sole director of a limited company, and I have £150k in my account at the moment. 

I would like to take out £50-70K from this to fund extensive house renovations which I need to do soon. 
I'll like to take this out as a Directors Loan, which I understand I have to pay back in full within 9 months and 1 year of my company year end date, to avoid paying corporation tax on 32.5% on the outstanding amount.
My question is, can I pay this back via the earnings that I make that already will be sitting in the account?
I am a freelance designer, and get paid into the limited company, so any money I earn will be paid straight into the limited company accounts. I am confident I can earn back the £50-70k into the account within the 9 month time-frame, providing I time the withdrawal correctly.
Does this constitute me paying back the loan? Or does the money need to come from an external source and be physically paid into the account like a 'normal' loan would be?
Thanks for your help.

Grumpy_chap

If you draw a loan from the business, you will need to actually pay the money back into the business at some point.

Can you pay yourself a bonus or dividends?

What does your Accountant say?

Beware you don't fall into a trap similar to those that got caught up by the loan charge.  Obviously, what you suggest is different to the loan charge schemes.

Jeremy535897

You seem to be indistinguishable from your company in your mind. It is a common misconception. "I am the sole director and have £150k in my account". If that were true you could just use it for the house renovations. I think you mean the company has £150k in its account?

You are not a freelance anything. You are an employee of a limited company, which you also happen to own. When you do work for customers, those customers are the limited company's customers, not yours. Any invoices come from the limited company and have to be paid to the limited company, not you. That is presumably why the limited company has £150k in the first place.

Loans are not the solution. If you want to use the company's funds for your personal expenditure, you have to pay yourself salary, dividends or a mixture of the two, taxable as normal.

csgohan4

it's not about putting back the money via income through the company, it is about putting it back after income/ dividends given to you. 

You need to as above, separate the company and yourself. You cannot simply borrow say 75 k from the company and pay it back through invoices, it has to come from your own personal account which you get via dividends or income. 

You need an accountant to ensure everything is above board if you decide to do this.  but if you are to pay back the money it is going to cost you alot, as you will breach the higher income dividend tax to pay back the 75k for example

TheCyclingProgrammer

It is possible to offset money the company owes to you (salary that has gone through the payroll, business expenses and dividends) against an overdrawn director's loan account, however you would still need to account for those things in the normal way - you need to run payroll for any salary and deduct any tax/NI due (if any), dividends need to come out of post-tax company profits etc. Instead of transferring the money, you can simply credit against the overdrawn loan balance. 

It is quite common for director's to declare a dividend to pay off all or part of a director's loan account, but remember even though you don't receive the money (it just becomes a transaction in your company books) it still counts as taxable income that needs to be declared like any other dividends. 

The only real benefit to taking a director's loan is it allows you to bring forward some income from the next tax year (i.e. you take the director's loan now and then repay it using a dividend after April next year) and potentially avoid some higher rate income tax but that only works if you can afford to sacrifice some income in the next tax year and stay within the basic rate band, otherwise you're just delaying the inevitable of paying some higher rate tax.

Coupled with the risks of taking a large director's loan and not repaying it (the temporary 32.5% tax charge for example) and also the fact that you would be required to charge yourself interest on any director's loan balance in excess of £10k you may be better off just taking a large dividend now (and accepting that you'll need to pay some higher rate tax).