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As a sole trader you can keep any profits you earn after paying tax and National Insurance. It’s a bit different for a limited company, because it’s a separate legal entity from its shareholders and directors. This structure means that you might take money out of the business which is a director’s loan.

What is a director’s loan?

If a company director takes money out of the company which they haven’t contributed, and the money isn’t a dividend or salary, it will be classed as a director’s loan.

Each director has their own director’s loan account, shown separately on the company’s records. A director’s loan account may be in credit or debit at any time.

Our Guide to Director’s Loans goes into more detail on the basics!

Charging interest on director’s loans

As a company director you may charge your company interest on the loan. This is usually at a similar rate to a commercial rate of interest, but this will depend on the amount and any risk attached.

Do I pay any tax if I charge interest on a director’s loan?

Charging interest on any loan you make to your company effectively means you’re making money on it. As such, companies deduct basic rate income tax (20%) from the interest payments before paying the interest to the director.

 

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Showing a director’s loan in the company’s financial records

In practice, a director’s loan account might be shown just as a book-keeping entry. It could also be a theoretical current account, or a loan account.

If your director’s loan account is in credit, you’re effectively giving your company a loan because the company doesn’t simply ‘keep’ the money. You can withdraw that credit at any time by taking the balance back from the business, without needing to enter it on the Company Tax Return.

Director’s loans and Corporation Tax

If the loan is repaid completely by the last day of the company’sCorporation Tax accounting period, it won’t pay Corporation Tax on the loan, and it isn’t included in the Company Tax Return.

If the loan isn’t paid back by the last day of the accounting period, but it’s paid back within nine months and a day after the last day of the accounting period, the company won’t pay tax but will need to include it in the Company Tax return.

If the loan is still outstanding nine months after the last day of the accounting period then it’s included in the Company Tax return, and the company must pay Corporation Tax on it.

The rate is 32.5%, (or 25% if the loan was made before 6 April 2016*). The company can reclaim any Corporation Tax it’s paid on the loan once it’s fully repaid.

Talk to one of the team about our online accounting services for your limited company. Call 020 3355 4047, ask for a call back, or get an instant quote online.

* Figures updated February 2020

About The Author

Lee Murphy

MAAT and ICPA accountant, with a passion for making accountancy and bookkeeping accessible. Other interests include cloud-based software development for web and mobile access, keeping fit, reading, and entrepreneurship.

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Vinod Patel
Vinod Patel
13th December 2021 6:45 pm

If you borrow on a property and let it to your company then the company pays you interest. This interest is deductable in the company. However, how would the director show it on his tax return. Would it be interest received and then a corresponing interest paid. So nil profit.

Elizabeth Hughes
Admin
Elizabeth Hughes
15th December 2021 9:42 am
Reply to  Vinod Patel

Hi Vinod

Thanks for your message. So, any interest received would be recorded and taxed on your Self Assessment: https://www.gov.uk/apply-tax-free-interest-on-savings

This might not be relevant for this question, though! Essentially you would be letting the property via the company, so this ‘interest’ would form part of the rental income received, to which you can then deduct the property expenses, including any interest paid.

I hope this is useful, but please do call the team if you’d like to learn more about what we can do to help: 020 3355 4047

Best wishes

Elizabeth

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