If you’re a director of a limited company there are various ways in which you can take money out of your company. It can be through a salary, through dividends or even through a directors loan. However, we are going to be solely looking at the latter today and that is a directors loan. Now, as opposed to when you were a sole trader with all the money in the company belonging to you, this is no longer the case, the money belongs to the limited company.
However, one of how you gain access to money from the limited company as a director of the company is through a ‘directors loan’. This is essentially a loan that isn’t classed by HMRC as a salary, dividend or expense, or that it’s not concerning money that you’ve invested or lent the limited company. If you are planning on taking out such a loan this must be recorded in your DLA or Directors Loan Account. This is purely so that when it gets to the end of the business year, it can be established whether you owe the company money, or whether the company owes you money.
Now, you’ll need to know what exactly your director’s loan account should be containing before taking out any form of loan as you’re going to want to ensure that you’re doing everything above board and by the book. There are 2 main items you should be recording within your DLA and they are:-
- Any funds (loans) that you’ve taken from the limited company as it’s director
- Any expenses that you have personally paid with the companies credit card or cash. It’s important to note that this doesn’t include business expenses as they are classed as being essential to the performances of your duty as an employee.
The only people that can take these loans out from your limited company is yourself or any other directors of the company. Nobody else can, no matter how high they are within the management ladder or whether they’re a non-executive chairman unless they have the title of director they can not access one of these loans.
Now, when do you have to pay this loan back should you be planning to take one out? Well, ideally you’re going to want to pay it back within 9 months as if you do this you won’t have to pay any tax at all on the loan. However, if the loan is still outstanding at the end of the year this could end up meaning that you could incur paying tax on the loan.
Also if your payments for the director’s loan are overdue this means you could end up paying 32.5% corporation more on top of what the company is already paying. It’s also important to note that if you owe your company over £10,000 you will need to record this on a P11D and you’ll also need to be aware that your company will be paying national insurance at the full amount of 13.8%.
If you want to know more about directors loans, what they are, how they work and whether you should be taking out one, get in touch with a member of the team here at D&K Accounts. We can sit down and explain to you exactly what the benefits and drawbacks of taking out a directors loan are so we can better establish if this is going to be the right decision.