A Director’s Loan account – what it is and how they work.

In Accountancy, Advice and tips by Caroline

What is a Directors Loan?

HMRC defines a director’s loan as when you (or other close family members) get money from your company that is not:

  • a salary, dividend or expense repayment
  • money you’ve previously paid into or loaned the company

Why could you need one?

Every now and again, things go wrong at the worst times – cars break down, white goods pack up, and the fees for your child’s school ski trip all come at once. Times like these may be when you may wish to consider a directors loan so that it can see you through your temporary personal cash flow crisis.

Do you need to pay tax on a Directors Loan?

If your loan is less than £10,000 then in most cases no, you won’t need to pay tax on it. If, however, you fail to repay the loan, then you will be liable to pay Income Tax on the loan. You may also be required to pay tax if you borrow the money, pay it back and then borrow it again straight away. If you do this in the 30 day period following the repayment, then HMRC will be likely to class it as earning rather than a loan.

Are there any risks in taking out a Directors Loan?

One benefit of having a limited company means that you aren’t personally liable for the company’s debt. If your company is going through financial instability, it could be risky to take out a Directors Loan. If the business goes into liquidation, you will personally be liable to find the funds and pay the loan back.

Another risk is that taking money out of your business could potentially lead to cash flow problems, so you will need to ensure that you have plenty of funds available.

Final thoughts on taking out a Directors Loan.

There are many perks to running your own business, and having the opportunity to borrow money for life’s sudden expenses is definitely one of them. But be aware that any money coming in and out of your’s or your company’s accounts can have implications with HMRC and so documentation is imperative. We advise discussing directors loans with your accountant to ensure you are fully aware of the risks and implications.

Get in touch with us today if you wish to have a friendly chat about taking our your Directors Loan.