As soon as you incorporate your business into a Limited company and become a director of that company, it becomes a separate entity from you. This means that you need to pay yourself from the business, and this is done in three ways:
- Salary via Payroll – you pay yourself a nominal salary each month which is filed with HMRC
- Dividends – you also pay yourself out of ‘post-tax’ profits, providing the business has made enough profits historically to be able to do so
- Expenses – you reimburse yourself for any business costs paid personally
Anything that you take out of the business which isn’t one of the above is classed as a directors loan.
Likewise, anything you put into the business (for example to temporarily help with cash flow) is also classed as a loan. This also applies for unpaid expenses, dividends or salary, these all go against your loan account as being owed to you until you repay yourself from the business.
You need to ensure that you’re keeping an eye on the balance of your loan account regularly.
As long as the account is in credit (i.e. the business owes you) then you’re fine, there are no tax implications of this and the balance owed to you is effectively tax-free money as and when you decide to repay yourself.
However, if your loan account goes overdrawn i.e. you owe the business, then there could be tax implications. The key date for this is your company accounting year end date. If you can repay the loan prior to your company year end then there are no issues.
But if not then your accountant will need to declare the loan to HMRC. You then have 9 months from your accounting year end to pay this back into your company, and again if you do so then there will be no tax implications. So for example, if your company year end was 31st December 2018, you have until 30th September 2019 to pay back any loans taken.
Failure to pay back the loan within 9 months will incur additional tax at 32.5% of the loan amount. If this loan exceeds £10,000 then you need to also record this on a P11d and the loan will also be liable to Personal Tax as well as National Insurance. So it’s vital you keep regular tabs on your Directors Loan position.
The tax legislation is huge and you are never going to be able to identify every opportunity to plan your tax affairs as effectively as possible.
That’s why we run our clients through a tax diagnostic tool to explore all avenues and make a comprehensive list of recommendations for now and the future. Click here if you’d like to book a Discovery Call to review your tax position.