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.
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.
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.
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