The main difference between trading through a limited company and being self-employed is how you are seen legally. Those who are self-employed are their own business, and therefore, the individual is taxed and liable. When trading through a limited company, the company itself becomes a separate legal entity. You are the Director and shareholder of the company and are basically seen as an employee. Working through a limited company offers security in that you will not be liable for anything more than you have invested into the business. However, there are complexities when it comes to trading through a limited company- one such thing being the Director’s loan accounts.
What is it?
The limited company’s bank account and the funds within it belong to the company, not the Director. Therefore, any money that is withdrawn from the company, that isn’t a salary, dividend, expense repayment or money previously paid in, is considered a director’s loan.
The Director’s loan account is a record of the transaction between the Director and the company. The account logs the amount of money owed to the company or the amount of money the company owes. It also informs the Director of how much money is left to be withdrawn tax-free and when they have withdrawn too much money.
Investments that you have made into the company, such as start-up and running costs, are classed as loans from the Director to the company. The company doesn’t pay any corporation tax on these funds, and the Director is free to withdraw at any time. If the Director charges interest on this loan, the interest is classed as both a business expense for the company and a personal income to the Director and therefore needs to be declared in their tax return.
There are many reasons for you to borrow money from your company- fuel, emergency repairs, even rent or holidays. For whatever reason, there isn’t necessarily an issue with directors borrow money from their companies, as long as it’s paid back within good time. It’s when directors owe money to their companies that things become slightly more complicated. This is because HMRC is suspicious of those who continually owe money to their companies as it’s a tactic some use in order to avoid paying tax.
There are also complications when a director borrows £10,000 or more from their company. If you owe your company over £10,000 and can’t pay it back within nine months of the end of the financial year, it will be classed as a benefit-in-kind, and it will be taxed as a personal income.
Even if you do pay the amount back before the deadline, HMRC may still tax you on it if they feel like the situation warrants it. This is especially true for directors who continually take multiple loans from their companies. HMRC will assume that the loans are acting as an unofficial salary and should, therefore, be liable for taxation.
It’s also worth noting that when a loan in excess of £10,000 is paid back to the company, the Director can’t take out another loan over £10,000 for at least 30 days.
Director’s loans are highly regulated and involve many different rules, which change according to the amounts of money involved and the duration it has been loaned. The entire area can be complex and confusing, creating a minefield for owners of limited companies. Therefore, advice from an expert with experience in this area can provide much-needed guidance and peace of mind. If this applies to you, we recommend that you contact a reputable accountant and they will be able to answer all the questions you may have on this topic.