Can I Borrow Money From My Limited Company?
YES, you can borrow money from your limited company.
A director can borrow money from their limited company from time to time. However, you must keep accurate and up-to-date records of such transactions in a director's loan account.
Regardless of how much money you want to borrow, it's essential to determine how much your business has to account for tax and staff costs.
So, how do you go about it? Are there risks involved? Do you have to pay back the money you borrowed from your company?
If these questions are bombarding your mind, we are here to answer them all and demystify the terms associated with a director's loan. Reading this post will help you understand how to keep such records and the tax implications you might face.
What is a Director's Loan?
A company director can receive money from the company in different ways. However, when a director takes money out of the business for purposes other than those listed below, it is known as a director's loan.
- Salary
- Dividends from shares they own in a company
- Repayment of business-related expenses
- Repaying money they previously paid into the business
- Pension contributions
When a director takes a loan from their limited company, they must pay it back. But why would a director take a loan from their business? Here are some of the reasons directors can borrow money from their company:
- Withdrawing company money for personal use
- Paying personal expenses using company money
- Using your company's bank card to make non-business purchases
- Paying yourself an illegal dividend by mistake
- Giving personal donations using company funds
Understanding the Legal Ways to Take Money Out of a Limited Company
There are four legal ways you can take money out of a limited company:
1. A Director's Salary
Most company directors pay themselves a salary through Pay As You Earn (PAYE).
A director's salary may or may not attract tax depending on the amount you pay yourself. Sometimes, you may have to pay National Insurance Contributions (NICs) or income tax.
Since salary payments are tax-deductible, the company doesn't have to pay Corporation Tax liability on the money. However, your company must pay 15.05% Employer's NICs on any salary above the secondary threshold of £9,100 for the tax year (2024/2025).
A salary within the NIC secondary threshold of £9,100 is tax-exempt. You qualify for State Pension and benefits if your earnings exceed the minimum of £6,396 annually.
Another tax-exempt salary classification is a personal allowance of £12,570. However, you must pay employee NIC contributions for revenue between £11,908 and £12,570.
2. Dividends
A shareholder in a Limited Company is paid to invest in a company by buying shares. The money a shareholder receives is known as a dividend. However, dividends are only payable to shareholders when the company makes profits. Otherwise, if a company pays dividends to shareholders when there are no profits, it's an illegal dividend.
The total amount a shareholder receives is dependent on the shares they hold. For instance, if you're the only shareholder, you can enjoy the entire profit after meeting all company expenses.
The taxable income of a limited Company attracts a 19% Corporation Tax, but it increases to 25% if profits exceed £250,000. Initial annual dividends below £2,000 aren't taxed. However, any excess amount is subject to Income Tax.
Before a company distributes dividends to shareholders, the dividends must be declared before the board and recorded in meeting minutes. Keeping proper records is essential as they detail all activities that happen in the company, like how much money is given to whom and when. Plus, there must also be a record of a dividend voucher displaying all dividend details.
3. Director's Loan
Taking out money from a limited company as a director's loan allows you to:
- Lend money back to the Limited Company
- Get a loan higher than the amount you paid in
- Reclaim the money you paid into the company
So, how and where are the details of a director's loan kept?
You must maintain a Director's Loan Account displaying all loan details as part of your company's balance sheet.
If you take out money paid into your business, the Director's Loan Account will be overdrawn, and you must meet related tax implications. When the company owes you money, your loan account is in credit, and you can withdraw money without bearing any tax liabilities.
For instance, if you borrow less than £10,000 from your company:
- You have no personal tax liabilities, but the company can face consequences if the loan is overdrawn for over nine months after a tax year or filing deadline. In this situation, the company must pay Section 455 Tax on the total amount overdrawn.
- Under Section 455 Tax, the tax charge is 33.75% alongside its Corporation Tax.
- All outstanding loans must be displayed with exact figures on the company's tax return.
4. Expenses
You can claim money you used for expenses solely for the business.
To reclaim this money, you must maintain all accurate and up-to-date records with all receipts. You can claim tax-deductible expenses on the following:
- Parking and mileage costs
- Entertainment
- Travel and accommodation
- Food and drinks
- Mobile phone contract costs
- Training costs
- Computer and office equipment
- Postage costs
When you incur any of the above expenses on behalf of the business, the money is reimbursed to you monthly or weekly at your convenience. The company must keep all receipts for such payments for six years, with a record of the expense detailing what the money was used for.
When the Company Owes You
If your limited company owes you over £10,000, here's what is likely to happen:
- A director's loan overdrawn over nine months from the company's year-end will face tax consequences. The company must pay Section 455 Tax on the withdrawn amount.
- Under Section 455 Tax, the tax charge is 33.75%, paid alongside Corporation Tax.
- When filing company returns, all outstanding loans must be displayed.
- When the director's loan exceeds £10,000, and you repay it with the HMRC rate, the loan isn't classified as a taxable benefit.
- Any loan not repaid with interest must be declared via the company's P11D and your Self-Assessment Tax Return. The loan is considered a Benefit in Kind (BiK) for the director to get an interest-free loan from the company.
- The value of the BiK is calculated at the official interest rate: the rate for Class 1A National Insurance is 15.05%, payable from the company through form P11D. The benefit is also included in your tax return and taxed at the correct rate.
Lending Your Company Money
Advancing capital to your company is considered a director's loan. The situation arises when a director has to use personal money to purchase equipment or stock up when starting the business. You can lend your company money to cover temporary cash-flow issues or expansion plans.
When running a limited company as the only director, you may assume all the business's money and assets are yours. After all, the profits accumulate due to your hard work. However, this mentality needs to be corrected. WHY? A limited company is a legal entity with rules you must adhere to.
As a legal entity, the company owns all assets and profits. It can enter into contracts, borrow independently, and assume liabilities like debts.
Hence, you can't treat the company's assets or profits as personal property, but you can make legal withdrawals as a director's loan, dividend, salary, or pension contributions.
While this 'corporate veil' may be restrictive, the company owners are protected by limited liability for any debts and legal issues of the business. Plus, when used correctly, it opens doors to greater tax efficiency.
When to Record a Director's Loan
All money that leaves the company must be recorded accurately: money you borrow or lend to the company, including all repayments. The record is called a 'director's loan account' (DLA).
When a director's loan account is overdrawn, the director owes the company money.
While the account is in credit, the company owes the director money.
A DLA can be managed on accounting software or a simple spreadsheet. You must keep a separate DLA for everyone if the company has multiple directors. Whatever method you use, the balance sheet must contain every director's loan account as part of the limited company's annual accounts.
A withdrawn DLA at the end of the company's financial year is displayed as an asset on the balance sheet, and if the account is in credit, it is shown as a liability.
Tax Implications on a Director's Loan
The money a director borrows from the company must be repaid in full. The amount you borrow and the time it takes to settle the loan can result in tax consequences.
To avoid significant tax liabilities, repay a director's loan within nine months after the company's accounting period for Corporation Tax. The accounting period is also your Accounting Reference Date (ARD), which marks your company's year-end and when annual accounts are made.
When a Director's Loan is Unpaid with Nine Months of the Accounting Period
When preparing your Company Tax Return at the lapse of your accounting period for Corporation Tax, all director loan balances must be reported on supplementary form CT600A.
If the loan isn't paid within nine months after the accounting period, the following is expected:
- The outstanding loan amount doesn't attract personal tax.
- The company must pay Section 455 tax at 33.75% on the outstanding loan amount. However, you can entirely reclaim the tax amount after repaying the loan.
- The company pays the official interest rate per S455 tax liability until the loan is paid fully and the interest can't be reclaimed.
Can a Director's Loan be Written Off?
A company can write off a director's loan by deeming the outstanding amount as a bonus or dividend. Treating the loan as a dividend is more tax-efficient, but only if the director doubles up as a shareholder and the income must be reported on their Self-assessment tax return.
The amount is liable to Income Tax and National Insurance Contributions (for a bonus) or dividend tax. The company won't qualify for Corporation Tax relief on the written-off loan, and its value is liable to Class 1A National Insurance.
Frequently Asked Questions
Do private companies borrow money?
Private companies can borrow only from directors apart from banks and financial institutions, provided the director declares that the amount he gives is not from borrowed funds.
Is there a limit to the amount of money a company can borrow?
There's no limit to the sums of money a company can borrow up to the paid-up share capital and the company's free reserves. Any amount borrowed more than the two combinations needs members in a general meeting through a special resolution.
How can I differentiate a Line of Credit (LC) from a loan?
A Line of Credit is a determined borrowing limit that can apply anytime, be paid back, and money borrowed again. A loan is given to the borrower depending on the borrower's specific needs, such as purchasing a car or home.
In Summary
Can I borrow money from my limited company? Yes, you can.
Borrowing money from your limited company is one of the most significant benefits of forming a limited company. The money you borrow from your limited company is a director's loan. A director loan is convenient, more flexible, and tax-efficient than borrowing from other lenders.
You can borrow up to £10,000 from your company without tax implications on the loan. Alternatively, you can lend your company short-term money instead of taking out a bank loan and paying hefty interest rates.
However, a director's loan is complex and needs careful consideration for potential tax liabilities and cautious administration. FAILURE to comply with the rules and regulations set by HMRC can turn out to be a time-consuming and costly burden.
You can avoid financial challenges by making the right decision concerning your company. How do you achieve this? Talk to a professional accountant before taking a director's loan to ensure you do the right thing for the company and yourself. Do you have questions about Borrowing Money From a Limited Company? Kindly contact our Incorpuk expert here for help.