We have produced this quick guide to inform you of the benefits and obligations you have in taking a loan from your company.
A director may receive a loan advance from his/her own company provided that it is not in financial difficulty and subject to adherence to the provisions of the company’s articles and the 2006 Companies Act.
It is important to remember that the loan will need to be repaid to the company.
1: Loan less than £10,000
This is the simplest scenario. There is no personal tax benefit charge on taking a loan of less than £10,000 from your company and this is a good way to get access to company funds in the short term.
To pay yourself a loan simply;
a) Transfer the required sum to your personal bank account, using a payment description of ‘Directors Loan’;
b) Record the loan payment within the Take Home Payments page of your online account. Select the bank account it was paid from, date paid, set payment type to ‘Directors loan’, and add the loan amount.
2: Loan greater than £10,000
The tax office regards a loan of over £10,000 as a personal taxable benefit. Note the entire loan is assessed as a personal benefit, not just the amount exceeding £10,000.
To eliminate the personal taxable benefit, you need to pay your company interest from your personal bank account on the loan balance at a rate of 2.00% (as at April 2021 – check here to get the latest rate). This loan rate is set by the HMRC.
We suggest the loan interest is calculated and paid annually for every personal tax year the loan is outstanding (i.e. for each year to 05 April). The interest is calculated on the average loan balance for the year, and we can help you with this calculation. Please just ask us.
You will also need to draw up a loan agreement between yourself and your company to record the loan details, and interest payments that will be made. We can help you prepare this too.
IMPORTANT 1
The loan needs to be repaid back into your business bank account within nine months of your company year-end. So if your example you took a loan on the 1 January 2021. and your company year-end is 30 June 2021. then the loan needs to be repaid by 31 March 2022.
You can find your company year-end date under the heading ‘Company registration info’ on your ‘Business info’ page.
It will not be possible to submit your Annual Accounts to the HMRC, until either (a) your loan has been repaid and this has been confirmed, or (b) you confirm that you will not be repaying the loan in this period (Please see Important 2 below)
IMPORTANT 2
If the loan is not repaid within nine months of the company year end, the company will incur a tax charge of 33.75% of the loan balance outstanding at year end. This tax is ‘temporary’. and is repaid back to the company once the loan balance is settled. If you do not intend to pay off your loan within nine months of your company year end, please tell us. so we can prepare your Corporation Tax return to include this tax charge.
The temporary tax paid under S455 is paid on the normal due date for corporation tax. And will only be repaid 9 months from the end of the accounting period in which the loan repaid.
For more detail see our article The Rules of Company Loans.
3: Bed and breakfasting
New rules took effect from 20 March 2013 that aim to block director shareholders from having indefinite use of company money without it paying a tax charge.
If you repay a loan to your company only to replace it a few days later with a new loan, HMRC will ignore the repayment ever happened and so the 33.75% tax charge will apply.
The 30 day rule: loan balances of £5,000 or more: if a repayment of £5,000 is made and then the same amount is withdrawn again within a 30 day period, the repayment is matched with the later withdrawal.
First in First Out (FIFO). The effect is that the original loan is not treated as being repaid.
Replacement rule for loans exceeding £15,000: if a repayment of at least £5,000 is made against an outstanding loan of £15,000 or more, but there is an intention to withdraw at least the sum repaid again later, it is not treated as a repayment but is instead matched against the subsequent drawing. The effect again being that the original loan is not treated as being repaid.
If you have a company loan, and want to avoid being caught by these rules and a S455 tax charge, our advice is;
a) For a loan of less than £5,000 these rules will not apply;
b) For a loan of less than £15,000, get temporary funding in place to repay your loan before the S455 charge arises, and you will then be able to withdraw the loan again once a 30 day period has expired;
c) For a loan of greater than £15,000, unless you repay this without using any form of temporary funding, the S455 charge will apply;
We have more information in a separate Loans article.