Care must be taken when borrowing money from your company. Please ensure that you fully understand the tax and National Insurance implications before taking any sort of loan from your company.
A director’s loan account is an accounting record of money being borrowed from or loaned to your company. By default the director’s loan account is enabled in inniAccounts: if you need to use your director’s loan account please read this guide carefully and contact your account manager if you have any questions.
Tax implications of directors loans
For income tax purposes HMRC class a directors loan as overdrawn if you borrow money from your company and this, at any point in time exceeds £10,000. If your loan account does become overdrawn by £10,000 it means you will have received a benefit in kind. Benefits in kind are any personal benefits received from your company that are taxable such as a company car, loan, gym membership etc. They must be declared to HMRC using a form known as a P11D and as a result additional income tax will be due plus your company will have to pay Class 1A National Insurance on the value of the benefits.
An added complication with a directors loan is if there is any balance outstanding on the loan when your year end accounts and Corporation Tax return are prepared it must be shown on your Corporation Tax return. Your company must then pay 32.5% of the loan value in additional Corporation Tax. For example, if you have a loan of £5,000 outstanding when your Corporation Tax return is prepared you will need to pay HMRC £1,625 in additional Corporation Tax. Once the loan is repaid the Corporation Tax on the loan amount can be reclaimed however this can’t be done until nine months after the end of the accounting period in which the loan was paid off.
We recommend your accounts and Corporation Tax returns are filed as soon as possible after your company financial year end however, as the filing deadline is 9 months after your company financial year end it is possible to delay filing your return. This would allow you additional time to repay the loan therefore avoiding the additional Corporation Tax.
Should you need a loan, keeping it below £10,000 will avoid additional tax and National Insurance and if possible, repay the loan in full before the end of your company financial year.
How to record borrowing money from your company
Should you need to take a loan from your company that is not in the form of normal payroll or dividend payments, the director’s loan facility can be used.
A common mistake when recording a loan from the business account is to use the ‘Enter new transaction’ > ‘Enter other outgoings’. The problem with this is that this transaction will not be correctly categorised in your accounts. Using a director’s loan account ensures that no tax is paid on the money when it enters and leaves your company.
To debit your director’s loan account:
- In the bookkeeping area, select the Business Bank Account.
- Click [Enter new Transaction] > [Transfer to another account].
- Enter the date, description, amount, and select transfer to Directors Loan account.
- Save the transaction.
In the example below it shows £5,000 being paid out of the company bank account. When you have entered the transaction, the amount can be paid from your business account to your personal account, then the transaction marked as matched. As a result your bank balance should match again exactly that shown in inniAccounts.
You now need to update your director’s loan account to match the transaction. From the Account list select Directors Loan.
You’ll see the £5,000 transfer has been created automatically in the director’s loan account which now needs to be matched. Simply click the transaction then press the Edit button. Mark the transaction as matched then save – your director’s loan account is now up to date.
When you view your LiveCash on your dashboard you will see the director’s loan listed within the ‘in’ section which indicates that the money is due into your company. Your loan will remain in your LiveCash as a reminder until it has been recorded as repaid.