If you are a sole trader business then if you take monies out of your business then the tax implications are usually nil. However, if you are a director and shareholder of a limited company then taking money from the company is not straight forward.
Normally you will receive money from your company in the form of salary or dividends. If you take any other payments from your company then this will be considered as a director’s loan. This is because a limited company is a separate legal entity in law, and therefore it has its own statutory obligations.
Therefore, any money borrowed from the company proper accounting records need to be kept and any money you owe to the company must be recorded in the Directors Loan Account and included in the annual statutory accounts filed with HMRC annually.
The rules regarding Directors Loan accounts are as follows:
Personal tax is due on any director’s loan over £10,000. If interest is paid on the loan below the official rate, further tax may be due.
Corporation tax will be due if the loan is over £10,000 and not repaid within nine months of the end of the relevant tax accounting period.
Class 1A National Insurance may also be due at a rate of 13.8% on the full amount of the loan.
HMRC will review Directors Loan Accounts in from the statutory financial statements so it is important to ensure all tax is being paid and that the rules and guidelines around director’s loans are being followed.
HMRC is clamping down on a method sometimes used to avoid tax on director’s loans called ‘bed & breakfasting’. It involves repaying any money borrowed from the company before year-end, temporarily closing it in the Loan Account to sidestep tax or penalties, then immediately taking out a new loan for an equivalent amount when the new accounting year begins.
Updated rules now dictate that when a director repays a loan of more than £10,000, a waiting period of 30 days needs to be followed before any further loan above this amount can be taken, otherwise HMRC will tax the full amount loaned.