Updated on: Sep 3, 2023
The short answer is yes.
However, today I want to present you with detailed information regarding loaning money to yourself from your limited company, looking at all the pros and cons.
Before I get started, you may hear terms such as a director’s loan account, directors loan, loan to participators, and beneficial loans. For the purposes of this article, they all relate to the same thing, which is a director/shareholder lending themselves money from their own limited company bank account.
At the end of this article, I will look at some frequently asked questions so, feel free to jump straight there if you have a specific question because I might address it directly there.
Who should read this?
This article relates to loaning yourself money from your limited company. The information I have put together here has been prepared on the basis of how the vast majority of our clients operate, and that is as a contractor working through their own limited company, based in the UK. If you are a sole trader, or work through a partnership, stop reading now because this article does not relate to you.
Four ways to taking money from your limited company
Just quickly, let’s go through the four main ways to take money from your limited company so you can understand the role that taking a loan can play.
Dividends
Dividends are paid to shareholders and most commonly our contractor clients are both director and shareholder of their limited company. Overall taking dividends from your business along with a salary is the most tax sufficient way of taking money from your business.
Salary
Taking a salary is also an extremely common way of paying yourself from your limited company. Most often our clients take a small director’s salary and larger dividends. However, it is completely up to them how they do this mix.
Expense reimbursement
A number of years ago it was not easy to get a credit card for your business bank account and so our clients would often use their personal credit (or debit) card to pay for business expenses. The business would then repay them through an expense reimbursement, which is not taxable income, (you do not pay tax and you do not pay national insurance contributions on expense reimbursements). Simply, the business is repaying the director for a cost that they paid on behalf of the business. With it now being more common to get business credit cards there is less expense reimbursement transactions happening for our clients.
Loan
And finally, there is the loan, which is what we will be talking about today. Taking a loan from your business operates exactly how you would expect. It is your business lending you some money on the expectation that you will pay it back at some point in the future.
Tax impact of taking a loan from your business
The main purpose of this article is to look at the tax and accounting impact of taking a loan from your limited company. The reasons a client might take a loan from their business includes buying a car, paying off a personal debt, or buying a rental property. What we have found over the years is that whenever a client takes a loan from their business, the key information they are after is the tax impact.
Unfortunately taking a loan from your business is not as straightforward as lending yourself some money from the business bank account and repaying it at some point in the future. There are two main tax issues that you must consider.
Loan interest
If your loan balance is less than £10,000 then no interest is payable. Note that this is on your total accumulated loan balance so if for example you took a loan of £6,000, and then another loan of £5,000, your total loan balance exceeds £10,000 and so you need to start paying interest on your loan.
If your overall loan balance never exceeds £10,000 then you do not work need to worry about loan interest at all and you can skip this paragraph and jump down to the next section that relates to S455 tax.
If your loan balance does exceed £10,000 then paying interest on the loan is what we advise our clients to do. However, it is not strictly true that you must start paying interest. When your loan balance exceeds £10,000 then the provision of this loan becomes a taxable benefit for you personally, and this must be reported on your annual P11D (which is used to report certain fringe benefits to the HMRC). This in turn will increase any personal tax liabilities that you face.
To avoid needing to do this, you can pay your business a rate of interest that is approved by the HMRC on the loan balance, and this is what we advise our clients to do. It makes the administration of having a business loan much easier, as it eliminates the need to report a P11D (unless of course there are other fringe benefits that need to be reported).
The current rate of interest that you need to pay on your business loan to avoid any taxable benefit is 2.25%. The HMRC call these ” beneficial loan arrangements” and you can find the applicable interest rate here.
The calculation of the interest payable on your director’s loan account is not quite as straightforward as you think and I won’t cover the details here; however it is important to get it right. You can see though that with the rate of interest being 2.25% the cost of having a loan is not huge and this factor by itself does not usually put off many clients if they are considering taking a loan from their business.
The more critical factor relates to S455 tax, and we will cover that now.
S455 tax implications
The legislation around paying S455 tax is found in Section 455 of the Corporation Tax Act 2010. That is how it gets its name, and that’s how we most commonly refer to it. S455 tax is the main barb when considering taking a loan from your company and its impact can be significant. With proper knowledge and planning your company will be able to handle this, but it’s not something you can avoid or trick your way out of with some creative accounting. So if you are looking to take a loan from your business have a good read of this section and make sure you fully understand the impact.
If I can summarize S455 tax with two descriptions I would call it (a) a temporary tax (b) a cash flow problem for your company.
If you take a loan from your company, it must be repaid within nine months of your accounting year end to avoid the S455 tax. The timing of the loan is important from a cash flow perspective and I will show you why.
Let’s say Harry has his own limited company with an accounting year end of 31st Mar 2023. He is looking to lend himself £8,000 pounds from his business to help pay for some renovations. He doesn’t have the personal savings for this at the moment but he does have a surplus of funds in his business and expects over the next 12 months he will be able to make that back in earnings from his limited company and so will be able to pay back the loan. If Harry takes the loan on 15th Feb 2023, he must repay it by 31st Dec 2023 which is 9 months after the end of the accounting period that he took the loan. This is not within his planned 12 month repayment window and so if he cannot scrape together the funds by 31st December and repay £8,000 back into his business bank account he will face a S455 tax charge.
If instead Harry managed to hold off starting his renovations until after March, and therefore take the loan at a later date. If Harry borrowed £8,000 on 15 May 2023, then he would have until 31 Dec 2024 to repay the loan. This is easily within his planned 12 month repayment window and so the S455 tax charge is avoided. And because the loan balance never exceeded £10,000 there is no requirement to pay loan interest. Essentially Harry has got to use £8,000 of his company money for 12 months completely free of any tax, charges, and costs.
How much is the S455 tax and how do I pay it?
The S455 tax rate on loan balances is 33.75%. Its not an insignificant amount which is why I mentioned above that it can create a cash flow problem for your business. Let me show you why.
Lexie has a surplus of £8,000 pounds in her limited company and is wanting to buy herself a new motorbike. The new motorbike will cost her £8,000 and realistically it’s going to take her several years to build up savings to purchase it, so she is thinking about loaning herself the money from her company. Because she will not be able to repay the loan within nine months of her year end her accountant has told her she will face this S455 tax. Planning ahead to when her corporation tax will be due for her next set of annual accounts, while she will have the money to pay her normal corporation tax bill, she no longer has the £8,000 pounds buffer in her business bank account, and she will face a corporation tax bill that now incorporates a S455 tax charge of £2,700 (8,000 * 33.75%).
So the actual cashflow impact to her business of making a £8,000 loan is £10,700. In this case her accountant should suggest taking a smaller loan of maybe £5,000 so that the company can afford both the loan plus the impending S455 tax.
The S455 tax is calculated when the usual annual company tax return is prepared for the business, and the overall annual corporation tax liability for the company incorporates any S455 tax due.
When is the S455 tax repaid
Once the loan has been repaid any S455 tax that has been paid on that loan will be refunded by the HMRC. There are a couple of ways of doing this, but the main point to be aware of is that the repayment of S455 tax is incredibly slow. For some of our clients who are closing down their limited company it can take over two years, which is mainly a reflection on how slow the HMRC are in processing S455 refunds.
Still though, the S455 tax is refunded which is why I refer to it above as a “temporary tax”.
Accounting chicanery
Firstly, let’s consider repaying your loan by taking another loan. The quick answer here is this will not work as there are specific rules in place to address this. Even if you try to think up a particular technique that you think might work with an elaborate plan that means you avoid the S455 tax charge, it probably won’t. Our best advice is if you’re starting to think about artificial ways of manipulating your cash flow to avoid paying S455 tax then you’re probably starting to fall within the realms of a tax evader, and that’s one place you don’t want to be.
How about if you get your business to pay the loan to someone else, and then they gift you the money, which you then use to repay your loan and avoid the S455 tax charge. Just consider my paragraph above around using artificial means to manipulate your cashflow.
In short, your best protection against the financial impacts of taking a loan from your business comes from two simple sources (a) a little bit of planning/forecasting (b) an awareness of the rules. If you are closing your company and moving overseas there may be tax saving opportunities for you.
Frequently Asked Questions
I wanted to finish off this article with some FAQ’s that directly address the most common questions we get asked by clients around director’s loans. If you have any questions lingering or potential scenarios you want to consider hopefully this will cover them off. If you can not find the answers to your question concerning director’s loans, get in touch, we will be more than happy to help you out and we can also update our blog with your additional query.
Can a director borrow money from a limited company?
Yes you can borrow money from your company. If you are the sole director and sole shareholder of the business, you don’t need to ask for anyone’s permission you can simply go ahead and lend yourself some of your company funds. We recommend to all of our clients that a Loan agreement is set up simply to put a bit of paperwork behind the transaction, and to ensure from an accounting perspective that the transfer of funds is recorded as per the wishes of the company.
What is the maximum directors loan amount?
There is no maximum amount that you can borrow from your business. As I mentioned above you don’t need to ask for anyone’s permission because you are both the owner of the company and control the company as the sole director. The only word of advice I would give is to remember that it is a Loan and that it does need to be repaid eventually.
Are directors loans illegal?
No, directors loans are not illegal. Under the Companies Act 2006, the general prohibition on a company making loans to directors was removed and replaced by the requirement to obtain prior shareholder approval. Since in the case of our clients the director is also the controlling shareholder, the approval is more of a formality than a legal issue.
How do I pay back my directors loan?
The two most common ways of repaying a directors loan account are (a) transferring funds from your personal bank account to the business bank account (b) declaring a dividend and using that to repay your loan. We call this a paper transfer. No cash actually changes hands you’re simply declaring a new payment of income (dividends) and reducing your loan by the same amount.
Less common but equally valid is accounting for a final distribution from your business when closing it down as a way to replay your loan.
What happens if I don’t pay back directors loan?
There are a few things to consider here but all have been mentioned above. You have the potential impact of loan interest, and of S455 tax becoming payable on the loan balance. If the loan is never repaid then this will be handled when the business is closed down where writing off the loan balance will be treated as a final distribution being made from the company.
Are directors loans tax free?
Directors loans do not count as income and so you do not pay income tax on loans in the way that you do for dividends and salary income. So you face no change on your income tax liability. You can pay yourself with as many directors loans as you like and it will have no impact on your personal tax liability. Your company however will face the S455 tax charge that we mentioned above and you will be required to pay loan interest to your business or face the taxable benefit charge if you don’t
Can a directors loan be written off?
Yes, directors loans can be written off, however how that impacts your personal earnings is another matter. You cannot simply right off the directors loan and forget about it. The amount written off will be treated as a deemed dividend under Income Tax (Trading and Other Income) Act 2005 however the HMRC may argue that it falls under ‘emoluments from an office or employment’ which will introduce an additional liability for your company of Class 1 national insurance contributions. Either way you will face additional personal taxes as well. When writing off a director’s loan you lose a little bit of control of the narrative in terms of how the taxation of that loan should be handled. Our best advice is to avoid writing off your directors loan. See “how do I pay back my director loan” above.
How long can a directors loan be outstanding?
There is no time limit on how long a directors loan can be outstanding and for a lot of our clients the loan will stay in place until they come to close down their business. As mentioned above though, if the loan is not repaid within nine months of the year it was taken then S455 tax will apply.
How do I get rid of a directors loan?
You get rid of a directors loan by repaying it. This can be done while the company is still trading or is handled when the company is closed down. Regardless, from accounting perspective directors loans are always eventually repaid.