When used wisely, company loans can be an effective way for directors to access company funds quickly. However, a company loan can also come with serious tax implications.
It’s important for directors to be aware of the ways that taking a company loan can affect their tax liability. Before taking this step, here’s what company directors should know.
Personal tax on director’s loans
Most directors will already know that a company loan could affect their personal tax if there are taxable benefits. If the loan interest is lower than the HMRC rate (3.75%) and the director’s beneficial loans total more than £10,000 during the same tax year, there will be a tax charge.
However, the beneficial loan tax charge isn’t that significant for directors paying the higher tax rate. For example, an interest-free loan of £20,000 for 6 months would only cost £150 in tax.
Company tax on director’s loans
If the individual is the director of a close company and a shareholder, the tax situation will become more complicated. The following rules generally apply to owner-managed companies:
- If a loan is repaid by the deadline for the company to pay Corporation Tax (9 months and 1 day from the end of their accounting period) then there will be no tax charge.
- If the loan isn’t repaid in full by then, there will be a company tax charge in addition to their Corporation Tax bill, applying 75% to the outstanding loan amount.
- The tax charge will be refunded back to the company if the director repays the loan.
This tax charge means that larger loans can become expensive for directors if they can’t repay. The loan will also be a red flag on the company’s balance sheet that may discourage investors or customers.
Get advice on director’s loan tax
If you are a director and borrow money from or pay money into your company, you must keep records of your director’s loan account and include these details on the balance sheet in your annual reports.
More information about director’s loans, and reporting and paying tax on them, is published on the government website. There is also the possibility of outsourcing your accounts management to an agent who can manage your financial records, filing, and taxes for you.
Here at gbac, our accountants in Barnsley can provide a range of services to help company directors with efficient financial management, from corporate finance to tax consultancy and more.
To discuss our accounting services, contact us to book a consultation with our team.