Directors Loan

Jaco70

I am about to take 30k directors loan out of my small company. The company can easily afford this, so no issues there. 

I need the money quickly to fund repairs in my other business (BTL, not limited company). 

I am aware the money will have to be repaid in full, and I’ve experience of directors loans in the past, although with the funds going the other way.

Realistically though, the full amount WON’T be repaid by the financial year end. So what will the consequences of this be? I have an accountant, but I don’t want to contact him until it’s done, because I’m definitely taking it out anyway, and don’t want the awkwardness of ignoring his advice. 

I assume I will have to pay a set interest rate, and that’s fine, but any other observations welcome. 

Grumpy_chap

Jaco70 said:

I am about to take 30k directors loan out of my small company. The company can easily afford this, so no issues there. 

I need the money quickly to fund repairs in my other business (BTL, not limited company). 

I am aware the money will have to be repaid in full, and I’ve experience of directors loans in the past, although with the funds going the other way.

Realistically though, the full amount WON’T be repaid by the financial year end. So what will the consequences of this be? I have an accountant, but I don’t want to contact him until it’s done, because I’m definitely taking it out anyway, and don’t want the awkwardness of ignoring his advice. 

I assume I will have to pay a set interest rate, and that’s fine, but any other observations welcome. 

Is the £30k from retained funds within the Ltd Co?
Have you considered taking dividend rather than loan?

Bookworm225

these are facts you could read for yourself...
Director's loans: If you owe your company money - GOV.UK

Director's Loan Accounts – the good, the bad and the ugly - BHP, Chartered Accountants

as the loan is >£10k outstanding for more than 30 days then:
The company (not you personally) is liable for section 455 corporation tax (and potentially NI).
a) pay corporation tax at the rate of 33.75% on the balance borrowed 
b) if the loan is not subject to an interest charge at the official rate the company will pay class 1 (employer's) NI  at 15% on the value of the benefit in kind 

If you do not pay interest to your company on the outstanding balance then for you personally the loan becomes a benefit in kind and must be declared on your personal tax return and subject to income tax payable by you on the notional interest charge you should have paid using the official rate of interest on the loan balance.
That income tax is payable every year by you personally until the loan is repaid in full.

If you pay interest to the company on the loan, but at lower than the official rate, the difference is still a BIK and any interest income received by the company is subject to "normal" corporation tax on the company. If interest paid at official rate, then no BIK arises at all on you personally, although obviously you must keep paying interest until the loan is repaid in full.

if you borrow more, ie increase the debt, then the extra borrowing triggers a new S455 charge if not repaid however, there is no annual s455 charge on the original borrowing., only on any increase.

Once the loan is repaid (either instalments or in full) the S455 charge will be repaid to the company (in instalment s or in full reflecting the repayments) so the company will get that money back. But it will not get the NI refunded.

if the loan is never repaid and is written off the entire loan amount is subject to personal tax and assuming you are a shareholder, it will be treated as a dividend and dividend tax will be payable by you.
The company will not get its s455 tax refunded in that case.

Bookworm225

Grumpy_chap said:. 

Is the £30k from retained funds within the Ltd Co?
Have you considered taking dividend rather than loan?

whilst dividend paid from retained funds is without doubt the most tax efficient option for the company, if the company does not have the funds to pay a dividend, it can still make a loan using money it has itself borrowed, the loan itself does not have to be from retained funds - hence the punitive tax regime re loans to address the fact directors can control what the company does.


loan from company
- company suffers cashflow implication of lodging a S455 tax sum with HMRC until such time as the loan is repaid 
- company may incur ER NI if interest is not charged at official rate
- if applicable, director pays personal tax on the BIK (30k borrowed at 2.25% = £675 BIK per year @ 20% or 40% etc, in other words effectively peanuts in personal tax)

withdraw as dividend
- no implications for company
- person pays one off dividend tax on 30k, at 8.75% and/or 33.75% and/or 39.35% depending on person's marginal tax bracket

in summary
a director loan is a cheap way to borrow money provided the money is repaid, but more expensive if it isn't

Jaco70

Bookworm225 said:

Grumpy_chap said:. 

Is the £30k from retained funds within the Ltd Co?
Have you considered taking dividend rather than loan?

whilst dividend paid from retained funds is without doubt the most tax efficient option for the company, if the company does not have the funds to pay a dividend, it can still make a loan using money it has itself borrowed, the loan itself does not have to be from retained funds - hence the punitive tax regime re loans to address the fact directors can control what the company does.


loan from company
- company suffers cashflow implication of lodging a S455 tax sum with HMRC until such time as the loan is repaid 
- company may incur ER NI if interest is not charged at official rate
- if applicable, director pays personal tax on the BIK (30k borrowed at 2.25% = £675 BIK per year @ 20% or 40% etc, in other words effectively peanuts in personal tax)

withdraw as dividend
- no implications for company
- person pays one off dividend tax on 30k, at 8.75% and/or 33.75% and/or 39.35% depending on person's marginal tax bracket

in summary
a director loan is a cheap way to borrow money provided the money is repaid, but more expensive if it isn't

Thank you, that’s clear.
It will be repaid, from outside income (ie rental income) and/or from dividends. I’m only six weeks into my company financial year, so I can assess how much is left on the directors loan in mid March next year and decide what to do then.
I can definitely take enough out in dividends to clear it, if needed. The reason that I don’t want to take a dividend at this specific time is that it will push my overall income quite high (and lead to bigger tax bills). 

Your summary at the end is uncomplicated and very clear, which is where these forums come into their own. 👍

saajan_12

Bookworm225 said:

Grumpy_chap said:. 

Is the £30k from retained funds within the Ltd Co?
Have you considered taking dividend rather than loan?

..

in summary
a director loan is a cheap way to borrow money provided the money is repaid, but more expensive if it isn't

Agree its a cheap way to borrow money, but at the end of that the money still ends up inside the company, so to subsequently draw it, you Also incur the cost of the dividend route. 

Hoenir

Bookworm225 said:

- if applicable, director pays personal tax on the BIK (30k borrowed at 2.25% = £675 BIK per year @ 20% or 40% etc, in other words effectively peanuts in personal tax)

Increased to 3.75% wef 6th April 2025. 

Bookworm225

Hoenir said:

Bookworm225 said:

- if applicable, director pays personal tax on the BIK (30k borrowed at 2.25% = £675 BIK per year @ 20% or 40% etc, in other words effectively peanuts in personal tax)

Increased to 3.75% wef 6th April 2025. 

and there was I thinking rates were dropping..... appears only to apply to savers