I hadn’t planned on writing a linked in article today, but after some emails back and forth with a client, I decided it was something that needed to be said.
When you are the director of your own company it can be tempting to borrow money from the company to tide you over in a tight situation, but doing so can open up tax implications that you may not be aware of.
If the loan is under £10,000 the loan can be interest free without much thought to it, that part isn’t a problem. However if the loan is over £10,000 at any point during the year, and the company does not charge you interest at least equal to the HMRC official interest rates , you may be liable for personal income tax on the interest you should have been charged, but were not. This all has to be reported and treated as a benefit in kind for national insurance purposes also.
Even if the loan is under £10,000, you have some reporting obligations on your company tax return, and you may have additional corporation tax to pay, based on the value of the loan.
If you repay the loan within 9 months of the end of your corporation tax period (usually your accounting year end, but not always if there is a longer than 12 month accounting period) and either the loan was under £5,000 or it was over £5,000 and you did not take another loan of £5,000 or more within 30 days, you need to report it to HMRC on your corporation tax return, but there should not be any additional corporation tax to pay. If however you do not repay it within 9 months of the end of your corporation tax period, or it was over £5,000 and you take another £5,000 or more within 30 days of repaying the original loan, you are to pay corporation tax at 32.5% of the original loan value as well as reporting it on the corporation tax return.
You can see all the HMRC details on this here.
Directors loans can be complicated, so it is always best to speak to your accountant before borrowing any money from the business.
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