Director's Loan Account?
A company is classed as a separate legal entity and thus money paid to the company is therefore not available to the director of the company unless explicitly paid as dividends or salary, or money is withdrawn as a reimbursement for a previous loan to the company. However, there is a way to get hold of company money up to a certain amount without tax implications.
A director should have a personal DLA (Director's Loan Account). Only directors can do this - not any other type of employee - although close family members are also listed. This account should record any transactions where money is taken from the company. The Loan account itself, depending on its balance, is an asset or liability and will be recorded on the company balance sheet.
The balance of the account is based on cash taken out of the company, personal usage of the company bank cards and then money paid back to the company. At the end of the company's reporting period (year end) the balance of the account needs to be recorded.
So far the DLA seems brilliant as money is taken from the company and no tax is paid!
Pay tax on a Directors Loan Account
If the account is overdrawn (i.e. not all loans were repaid) at the year end, HMRC requires tax to be paid. You can get around this by paying of the remaining overdrawn amount within 9 month of the year end.
If the amount is not repaid, the company will pay 32.5% Corporation Tax on the outstanding amount. This tax will be repaid to the company once the loan is reported as repaid.
If the loan outstanding is over £10,000 then 13.8% of the entire amount is liable to Class 1A employers NICs. As an individual, personal taxes should normally be limited to the loan amount being classed as a benefit in kind on the P11D.
Write off the Directors Loan?
As said previously, personal taxes are normally restricted to benefits in kind - unless the company writes of the loan. Then the entire loan amount will be classed as income and need to be declared on the director's tax return. The company will also have to pay employers' national insurance on the loan.
Company Equivalent of Balance Transfers!
Why not constantly take money and repay in short time hops. HMRC class this as 'Bed and Breakfasting' and will tax you. If a loan of over £5,000 is taken and £5,000 or more was also taken within 30 days of repaying it, the company becomes liable to corporation tax of 32.5% of the original loan. Once the original loan is fully paid off the corporation tax charged can be reclaimed.
Lend money to your own company?
A director can lend the company money and not incur any penalties. If the director charges the company interest, the company can add the interest charge as an allowable expense but the director who earns the interest has to declare it as interest on their personal tax return.