Whenever meeting our clients, we try to make sure that any jargon is explained as clearly as possible so that they are fully aware of the meaning of any terminology we use. You may have heard the term “Director’s Loan” when discussing your limited company’s end of year accounts, but if you are a new business or considering going limited, this is probably not something you’ve heard of before.
What is a Director’s Loan?
Director’s loan is essentially any money that leaves the company account but not as wages, dividends, loan or expense repayments, which goes to the director. It’s also any money that goes into the company account, from the director, in form of a loan to the business. For the purpose of keeping track of these outgoings and incomings, limited companies have what’s called a Director’s Loan Account.
Any money you pay in to the company is owed to you at face value. You may choose to inject some of your own cash into the business, especially in the first few months of trading or when the company has cash flow issues. You may choose not to get paid at all or take a part payment one month, this would also count as a director’s loan which can be paid back whenever the situation allows you to do so. It can also be any equipment you’ve purchased from your own money for the business (without using petty cash). Do be careful when claiming for travel and subsidence this way as it can affects your personal tax.
If you decide to take out a loan from your business or loan money from the business to a family member, business partner or any other associate – this is treated as a director’s loan. Make sure you keep a strict log of how much and when it was taken out and include details of this loan in the minutes from your board meeting. It’s important to remember that the money should be paid back within 9 months to avoid paying extra Corporation Tax of 32.5% (used to be 25%) . The good news is that this tax can be claimed back once you’ve repaid the director’s loan to the business. Once paid back, the money must remain in the account for at least 30 days, otherwise it’s not treated as a genuine repayment.
Any director’s loans over £10,000 are classed as a taxable benefit in kind which is also worth remembering.
Read more about Director’s Loan here: https://www.gov.uk/directors-loans
If you are thinking of taking the next step and registering your company as limited, please get in touch with one of our advisers who’ll be more than happy to help.
Office Telephone: 01752 895648
Office Address: 15 Erme Court, Leonards Road, Ivybridge, PL21 0SZ