It may be that at some point you need to borrow money from your limited company, otherwise known as a directors loan. It should be noted that an overdrawn company account is treated for tax purposes exactly the same as a directors loan.
Borrowing the money from your company
Whether the loan is a small or large amount, for a short or long period, before transferring the money from your company, you must ensure that the company has sufficient funds to meet its other liabilities, including corporation tax.
Loans where the amount exceeds £10,000 require shareholder approval, but as contractors are generally the sole shareholder, this is often a formality.
Loan amounts below £10,000
Provided a loan taken from your limited company is below £10,000 and that it is repaid within 9 months of your company year end, then it can be interest free and there is no tax charge to the company. This means that there is no benefit in kind recorded and it needn’t be reported on a p11d.
Loans that are outstanding at the end of the accounting year must be recorded on the company tax return.
Loan amounts above £10,000
Providing the company has sufficient funds. then loans of any amount can be taken. However, a tax charge will apply.
If the loan is interest-free you will be treated as having received a benefit in kind equivalent to the official rate of interest set by HMRC which is currently 3.25% (reducing to 3% from 6th April 2015).
This means that for example if you received £20,000 from the company for a year the benefit in kind would be £650.
You would pay tax on £650 at the basic or higher rate as appropriate and the company would be liable for Class 1A NIC at 13.8% of £650 = £89.70.
If you want to eliminate the benefit in kind you would have to pay £650 to the company.
Extra tax charges
Regardless of whether the directors loan is below or above £10,000, all loans that are outstanding at the end of the accounting year have to be reported on the company tax return and if they have not been repaid by the date that the corporation tax is due incur an additional tax charge of 25% of loan. The tax is repaid to the company when the loan is repaid.
Writing off a loan
When a company writes off a loan to a director it can do so in a couple of ways:
- As a distribution (effectively as a dividend) for Income Tax purposes but not also as earnings for tax purposes.
- As earnings for NICs purposes calculated through the payroll.
In most cases, if the company has distributable reserves it will be preferable to treat the loan as a dividend in order to avoid a NICs charge.
There is also the option of the company voting a bonus and thus treating the write off as earnings. If this path is followed it must be via under Real Time Information (RTI) for PAYE.
Other general points
If the loan is made to your spouse, then the same guidance as above will apply. However, loans made to friends or family may be treated differently for tax purposes depending on whenther they are shareholders in the company. In these circumstances should be discussed with your accountant to ensure correct tax planning is taken care of.