What is a director’s loan & how do they work?

Should I borrow money from my company by taking out a director’s loan? Or should I loan money to my company? Both of these questions may arise from time to time when you are a company director. To answer them, you’ll need to understand what is mean by a director’s loan, how your director’s loan account works, and the responsibilities and risks involved when borrowing or lending money in this way.

What is a director’s loan?

A director’s loan is money you take from your company’s accounts that cannot be classed as salary, dividends or legitimate expenses. payday loans Tiffin OH To put it another way, it is money that you as director borrow from your company, and will eventually have to repay.

Another kind of director’s loan is when a director lends money to the company, for example to help with start-up costs or to see it through cash flow difficulties. As a result the director becomes one of the company’s creditors.

When and why might I borrow from my company?

Taking out a director’s loan can give you access to more money that you are currently receiving via salary and/or dividends. Director’s loans are typically used to cover short-term or one-off expenses, such as unexpected bills. However, they are admin-heavy and come with risks (such as the potential for heavy tax penalties), so they shouldn’t be used routinely, but rather kept in reserve as an emergency source of personal funds.

What is the director’s loan account?

The director’s loan account (DLA) is where you keep track of all the money you either borrow from your company, or lend to it. If the company is borrowing more money from its director(s) than it is lending to it, then the account is in credit. However, if the director(s) borrow more, then the DLA is said to be overdrawn.

Be aware that shareholders (and perhaps other creditors) may become concerned if your DLA is overdrawn for any length of time. You should aim to ensure that most of the time it is either in credit or at least at zero. Find an accountant for your small business who can help with putting together a director’s loan account.

What is the interest on a director’s loan?

It is up to your company what interest rate it charges on a director’s loan. However, if the interest charged is below the official rate then the discount granted to the director may also be treated as a ‘benefit in kind’ by HMRC. This means that you as director may be taxed on the difference between the official rate and the rate you’re actually paying. Class 1 National Insurance (NI) contributions will also be payable at a rate of 13.8 per cent on the full value of the loan.

The official rate of interest changes over time, in response to base rate changes. In the year it is 2.5 per cent.

How much can I borrow in a director’s loan?

There is no legal limit to how much you can borrow from your company. However, you should consider very carefully how much the company can afford to lend you, and how long it can manage without this money. Otherwise the director’s loan may result in cash flow problems for your company.

Also bear in mind that any loan of ?10,000 or more will automatically be treated as a ‘benefit in kind’ (see above) and must be reported on your self-assessment tax return. In addition you may have to pay tax on the loan at the official rate of interest. For loans of ?10,000 or more you should seek the approval of all the shareholders.