Complete guide on Directors Loans Accounts

As a director, there might be instances, such as financing a house deposit, certain purchases etc., when it becomes imperative to borrow money from one’s own limited company. In such circumstances, it becomes necessary to understand how an individual is related to his company, how will the director loan be treated, and how can an individual shield himself from paying huge tax bills.

The amount corresponding to a director’s loan maybe subjected to taxes. A company may also be required to pay tax for a shareholder or a director. The personal and company’s tax responsibilities depends on, if the director’s loan account is overdrawn or is in credit.

Corporation Tax

The tax insinuations of a director’s loan depend on when you pay it back. You’re not required to pay any tax on it if you pay back the entire amount by nine months of the company’s year-end. An unpaid director’s loan will increase the Corporation Tax upto 32.5% on the remaining amount.p>

You must circumvent repaying a loan and then taking it out again soon after. This is an avoidance process that HMRC call “bed & breakfasting”. If they practice such activity they will treat the loan as never having been recompensed and tax the company consequently.

Directors Loan Account New Rules

• From 6 April 2016, the tax payable on outstanding loans was increased to 32.5% for loans, arrangements and advances made on or after 6 April 2016
• In the 2016 budget, the new measure was announced and introduced through the Finance Act 2016

Personal Tax

Interest free loan of more than £10,000 will be categorized and considered as an advantage in kind and will be required to record on a P11D and Class 1A National Insurance is payable by the company at 13.8%.

Directors Loan Account Disclosure

According to the Companies Act 2006, section 413 provides for revelation of the particulars of any advances / loans / credits granted by a company to its directors. The details required include:

• amount of loan / credit approved during a financial year
• information on the interest rate applicable
• other important information and any amount written off or reimbursements, if any
• the notes of the account should also state the full amount of loan and the full amount of interest applicable
• Under the FRS 8 related party disclosure, details for transaction with the directors is also required.

Overdrawn Directors Loan Account

Any payment made to a director, which does not form part of a director’s compensation must be set of against the director’s loan account. If a director has credit available, the payment can be set of against the director’s loan account with no tax implications. However, if there is no credit balance, the director is a debtor and is liable to pay the amount along with the applicable interest rate.

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Other services

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