Director’s Loan Account
Monday, July 6th, 2020 in: Advice
Director’s loan account explained by Cheltenham Tax Accountants
What is a director’s loan account? Stephen Edwards is the founder and director of Cheltenham Tax Accountants. In this blog post we will discuss how a director’s loan account works for limited companies in the UK. If you would like any specific advice feel free to book a free meeting from the top of the website in a few clicks to arrange a chat to discuss your circumstances.
What is a director’s loan account?
In this article we will look at the key aspects of a directors loan account to include;
- Director’s Salary – Paying yourself a salary / How do I pay myself a salary from my own limited company and do I need to set up PAYE/payroll scheme?
- Paying yourself dividends from your own limited company – What are dividends and how do I pay them to myself?
- Loans from the business – Can I loan money from my own limited company and what are the tax implications for this?
- Loans to your own limited company (known as capital introduced) – If I loan money to my own business, how do I repay myself and can I add interest?
- Paying yourself back for business expenses such as mileage and travel
Before we dive into the detail please note that you are more than welcome to book a free discovery call so that we can answer any specific questions that relate to your own limited company and your directors loan account.
When you start your own limited company one of the main considerations is how you pay yourself as the director. Generally the two ways you pay yourself are either through PAYE as a directors salary or as a dividend from the profit in the business. Most people in the UK qualify for an income tax free allowance on an annual basis. This is currently over £12,000. As a limited company director your salary below this threshold will be tax deductible expense in the limited company.
You can also receive it completely tax-free. In addition to this it is beneficial to pay yourself a salary up to the tax threshold and certainly above the lower level national insurance threshold to qualify for your national insurance credits which will contribute towards your state pension when you retire.
Directors loan from limited company
If there is not sufficient profit in the business to pay yourself dividends than one option is to possibly pay yourself a loan from the limited company. There are special tax rules for directors loans to avoid directors from benefiting favourably from tax. The scheme was abused several years back most notably by footballers in the public eye. Currently as it stands a directors loan balance can be subject to 32.5% tax as part of the annual limited company corporation tax liability although it may be repaid if the loan itself is repaid.
Anything above and beyond your directors salary will typically be a dividend. A dividend is paid from the profit the limited company has made. Technically speaking you should keep board minutes to vote a dividend and also draw up dividend vouchers. Dividends in the UK can be paid currently up to £2000 tax-free on an annual basis and anything above this while a basic rate taxpayer attracts 7.5% tax. If you are a higher rate taxpayer the rate increases to 32.5% and beyond as your earnings increase. One key threshold to be aware of is £100,000 as your personal allowance is gradually reduced to zero which effectively means this is an additional tax rate. It is worth noting that if there is not sufficient profit in the business to pay yourself it cannot be treated as a dividend. For example if you had £10,000 in the bank which was owed out to suppliers then technically speaking this could not be paid to yourself as a dividend.
Learn about the other things to consider with a directors loan account
Please watch our video to take a more in-depth look at a directors loan account. You can also learn more from this page on HMRC’s website.
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