As a sole trader you can keep any profits you earn after paying tax and National Insurance. The way that you move personal money in or out is a bit different for a limited company, because it’s a separate legal entity from its shareholders and directors. If a director loans their own money to the business, they may be able to charge interest on the amount that they’re owed, depending on the circumstances.
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’s normally classed as a director’s loan. You’ll need to keep a record of these transactions known as a director’s loan account, with a separate account for each director.
The director’s loan account will also show any personal money that you lend to the business, so the account may be in credit or debit at any time.
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 my company interest on a director’s loan?
Charging interest on any loan you make to your company effectively means you’re making money on it. Because this is a type of income, the company must deduct the basic rate of income tax (20%) from the interest amount before paying it to you. The interest which you charge to your limited company also counts as a business expense.
You’ll need to tell HMRC about the interest payment you receive, and your company must report the income tax which it deducts.
The company declares the income tax deductions using a CT61 form. The form is only available on request from HMRC, so you can’t just download it.
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’s Corporation 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.