If you’re a director or shareholder are you okay borrowing money from your company?
We’ve been asked a few times lately if a director/shareholder can borrow money from their limited company.
There are lots of points to consider, so please read on to find out if you can borrow money from your company and the implications of doing so.
If you owe your company money, this would be classed as an overdrawn director’s loan account. This is because you have received money from your company that hasn’t been declared as salary or dividend income.
Whilst it is possible to owe your company money, there may be tax consequences and if not budgeted for in advance it can cause major cashflow problems.
If you borrow money from your company and the amount is repaid in full within 9 months of your company year-end, no additional Corporation Tax is due.
So, if your company year-end is March, you must have fully repaid the amount owed by the end of December (within 9 months of the year end).
When is Corporation Tax Payable?
However, if you still owe your company and do not repay the loan within 9 months of your year-end, additional Corporation Tax (S455 tax) will be payable on the outstanding amount.
The rate from 6 April 2022 is 33.75%.
For loans made between 6 April 2016 and 5 April 2022 the rate is 32.5%.
The amount you pay is reclaimable, however as HMRC essentially holds on to the tax paid until the loan has been repaid to your company. However, you can only claim the tax back 9 months and one day after the end of the account period in which the loan was repaid.
Consequently, for the above example, if the loan was repaid in the next accounting period to the 31st March, the company wouldn’t be able to reclaim the tax back until the 1st of January the following year.
The rule also applies to other shareholders, even if they aren’t directors.
Disclosure of the Overdrawn Directors Loan Accounts to the Outside World
Another important point to bear in mind is that any overdrawn directors loan account still outstanding at your company’s year-end will need to be disclosed in the company’s accounts.
It will therefore be able to be seen on the public record at Companies House, which may give the impression that you are living beyond your means to the outside world!
Extra Considerations If the Overdrawn Directors Loan Account Was More Than £10,000
If the loan was over £10,000 and you are not paying the company interest at the current rate recommended by HMRC your company must treat the loan as a “benefit in kind”.
This means that you must report the loan to HMRC through your payroll or on an annual P11d form. You’ll have to pay tax on the calculated benefit, and the company would be required to pay class 1a national insurance on the provision of the interest free loan.
We can take care of the calculations and deal with the necessary filing obligations for you.
So, to answer the question can I borrow money from my company? The answer is yes, it is possible, but it is important to consider your personal situation/finances before borrowing money from your company so that any nasty surprises are avoided!
Please do not hesitate to contact us if you have any questions or require any further explanations.