Lending to your own company is a good way to grow your business and can come with tax benefits. Like most financial transactions, there are tax implications.
Lending/borrowing money from limited companies has risks and benefits:
Risks:
- Non-repayment
- Associated tax risks
- Possible strain on company cash flow
Benefits:
- Access to additional capital
- Flexibility
- Tax advantages
- Possible interest income (lenders)
Before you withdraw or put funds into your limited company, it’s essential that you are aware of the related rules and procedures. In this blog, we’ll explain some of the complexities of lending and borrowing, providing you with advice so that you can approach the matter with confidence.
Archimedia Accounts work with ambitious businesses in Nottingham to help them minimise their tax liability and grow their businesses. If you are seeking tax advice and professional, all-around accounting services, please get in touch with our friendly, family team.
Who can borrow money from a limited company?
Both Company Directors and employees can lend money from a limited company. Let’s take a look at each in turn, including how it affects Income Tax, Corporation Tax and NI contributions.
Loans for limited company directors
Limited companies are separate legal entities from their directors. So, as a director, even if you’re the sole shareholder, you can still owe and be owed money from your limited company. Any money that is borrowed from the company must be paid back.
Whenever you use your company’s money to purchase personal items or you transfer money from the company bank account to your private bank account, it is considered a Director’s Loan.
A Directors Loan is a really fluid way of taking money out of your company and putting your own money in without going through too much admin hassle. As long as you record it the right way, you’ll always have a clear view of the remaining loan amount and the tax you owe.
What is a Director’s Loan Account?
A Director’s Loan Account is a financial record that tracks transactions between a director and their limited company. It shows the amount owed by the director to the company or vice versa, serving as a tool for monitoring and reconciling these financial interactions.
How is a Director’s Loan Account recorded for accounting purposes?
Good bookkeeping is key to a successful Director’s Loan Account. When you transfer cash from your company to yourself, it should be coded in the company’s balance sheet under Director’s Loan Account.
If you later receive dividends or a salary from the company, these payments can also be coded to Director’s Loan Account, cancelling out the amount you owe.
It is also recorded in the company’s annual accounts.
Do you pay income tax on a Director’s Loan?
If a director’s loan is paid back within nine months and one day after the end of the accounting period in which it was taken, it is generally not subject to tax. Unlike dividends and salary, you do not usually pay National Insurance Contributions on a Director’s Loan.
If the loan is not paid back within nine months, the tax treatment is as follows:
How you pay income tax on a director’s loan depends on if you decide to add an interest charge. If the loan is interest-free or charges a rate below market level, it could be considered a Benefit-in-Kind (BiK), which must be declared on the director’s personal tax return.
In this instance, tax is essentially charged on the difference between HMRC’s interest rate and the interest rate of the loan. You will also pay employee NIC contributions.
These personal tax liabilities are sometimes avoidable, but it depends on how much you owe and the timing. It’s best to consult your accountant if you are unsure.
If the loan charges a market-rate interest, the interest income is taxable for the director, and it becomes a tax-deductible expense for the company to be set off against its Corporation Tax bill. While there may be income tax implications for the director personally, often the saving on Corporation Tax is far greater.
Director’s Loan – benefits
A director’s loan is a very flexible way of transferring money to and from your company. Here are some more key benefits:
- If you draw a minimum salary as a basic rate taxpayer (a common tactic for tax planning purposes), you can still take out more money each month from your limited company because the difference can go to your director’s loan.
- At the end of the year, if you owe your company money, you can distribute dividends to clear the outstanding debt to avoid additional taxes.
- If you wish to invest in new assets (such as machinery) for your company but don’t have the funds, you can simply transfer funds from your personal bank account to your Director’s Loan Account without tax implications.
When making these kinds of transactions, it’s very wise to consult your accountant so that you can make the most of the tax benefits and avoid common pitfalls.
Loans for employees
If the company has spare cash flow, a good way to incentivise you and your employees is to offer up to £10k loans, interest-free. This can be a very attractive benefit to attract and retain employees.
If the company is charging zero interest or interest below market value, then it’s classed as a ‘beneficial loan’, which means there are tax/NI implications. However, for employees (that are not directors), if the loan is under £10,000, then there are usually no tax implications.
Can a limited company director lend money to their limited company?
It can be beneficial at times to put your own money into your limited company, e.g. for projects, operations or investments. When you do, your limited company owes it back to you.
There are a few benefits to this for both the company and the director. For one, since the loan represents money owed to the director, they can withdraw funds from the company at any time without any tax liabilities.
The director also has the opportunity to charge interest on the loan provided to the company. By doing so, they can earn interest income, potentially increasing their overall return on investment.
Thirdly, the director can charge interest on the loan to the company, which is a great tax-saving strategy! The interest paid by the company is treated as a business expense and is deductible from its taxable profits, reducing its overall Corporation Tax liability.
Tax advice and planning from Archimedia Accounts
The team at Archimedia Accounts are entrepreneurs as well as accountants, so we have unique insight and experience when it comes to reducing your tax burden. We are tax planning specialists and will work hard to understand your situation to save you and your company money.
Contact us today to arrange a consultation.
Conclusion
Both employees and directors can benefit from loans to & from a limited company. The tax implications depend on the loan and interest amount.
A Director’s Loan Account is flexible and relatively straightforward, enabling directors to pay for personal expenses from the business bank account with ease. There are also potential tax advantages to lending money or borrowing money from your own company.
There are risks, however, the biggest being that you become significantly overdrawn and end up owing your company too much money. But the dangers can be mitigated if you have a great bookkeeping system so you know how much money you owe or are owed your company every month.
It’s very wise to get the advice of a good tax specialist accountant before embarking on these types of financial transactions.
Further reading – How to pay yourself as a company director
