What is a Director’s Loan?

A regular question that our clients ask regarding their limited companies is "what is a director’s loan?" Our clients frequently enquire about this and are confused whether they would be fined for withdrawing a directors loan from their business bank account.

Read more to clear your mind of these questions by reading more from our blog along with giving you a comprehensive guidance on what a director’s loan is, who is entitled to have one, what is the procedure of withdrawing a director’s loan and the impacts on your finances.

What is a director’s loan?

The Government’s website describes a director’s loan shown as below:

"A director's loan is when you (or other close family members) get money from your company that isn’t:

• a salary, dividend or expense repayment
• money you've previously paid into or loaned the company"

All companies have a figurative ‘director’s loan account’ which starts at 0 till you withdraw a director’s loan. An overdrawn director’s loan account will be created if you take a director’s loan.

Who can take out a director’s loan?

There are many reasons why you may need a loan for example, financing a house or a buying a substantial purchase.

As the director of your own company, you are permitted to draw out funds from the company. Money that’s taken out of the business bank account – aka the director’s loan account - not linking to wages, dividends or expenditure repayments will be categorised as a director’s loan and therefore ought to be well-thought-out before withdrawing any funds.

It is an obligation director’s loans have consent from all of the company’s shareholders, especially loans reaching more than £10,000. It is very simple to do as typically, contractors are the sole trader and shareholder of their own company. Usually, a director’s loans must be logged and signed off on board minutes. Leaving enough funds in your business bank account is important if you are planning on withdrawing a director’s loan, you must remember to include to cover your limited company liabilities, such as Corporation Tax.

Confirming the essential consent from the shareholder will be easy as for most limited company contractors similar to yourself, it is likely that you are the sole director and shareholder for your limited company

How do you withdraw a director’s loan?

Continuing the point above, permission and express approval is compulsory from the company’s shareholder(s) before the directors loan can be withdrawn.

Directors loans are taken when company money has been withdrawn from the business bank account without paying dividends or wages. Many contractors mistakenly have a director’s loan, if this occurs and they try to allocate a dividend when there aren’t sufficient profits in the company it seems to be a dividend.

Repaying your director’s loan and when to do it

There are harsh rules on director’s loans from the HMRC. There are a few factors to consider when taking out a loan, such as that the loan must be repaid within nine months and one day of the company’s year-end. If this criterion isn’t met in this period, there will be a consequence and outcome in tax implications of 32.5% on any unpaid loan sums.

For example, if someone lends you £10,000 on 10th May 2017 and your company year-end is on 30th November, you will still have 31st August 2018 to repay the loan. This allows just over fifteen months to reimburse the director’s loan. This is important that if you decide to take this option of withdrawing a director’s loan from your limited company, then you will have to guarantee you can pay back the loan amount within the HMRC’s period given.

How to repay your loan

Reimbursing the director’s loan that you have withdrawn from your limited company is easy, you just allocate the money over the back to the company bank account or credit the director’s loan account – this is a figurative rather than an actual account – that has a wage or dividend payment.

It is recommended you instantly don’t take out a director’s loan after repaying one, as HM Revenue & Customs views this procedure as a tax avoidance strategy know as ‘bed and breakfasting,' there are rules to reverse this. More guidance on this is available by contacting us to go in more depth.

Read further Directors Loan and Tax Implication and New Flat Rate VAT Scheme changes 2017

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