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Tax Treatment of the Directors Loan Account

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Tax Treatment of the Directors Loan Account

Nick Bonnaud ACMA explains the tax treatment of the Directors loan account in the short video below.

What happens when you borrow money from your own company?

You may think “Well it’s my company, I’ll borrow what I like”, but HMRC don’t quite see it as that simple.

Hello, I’m Nick and welcome to Quest. Today I’m going to talk about borrowing money from your own company.

It’s normal practice that people who own their own company take money out whenever they feel like it. This is known as the director’s loan account and with you as a shareholder and as a director has borrowed money from the company.

And the history behind this is that people used to take money out of the company and HMRC would say ‘well, we know it’s your company but that’s income you’ve taken income out of that business, so you could pay income tax on it and the response would be ‘uh no no no, it’s not income, it’s a loan I’m gonna pay it back one day and the next year they would take another loan and then another and then another and then 20 years later they would drop down dead having paid no tax whatsoever.

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It’s not quite what happened, but it will give you a flavour as to why HMRC approaches the subject in the way that they do.

So they have rules around borrowing money from your own business and rule number one is if you don’t pay that money back nine months after the end of your financial year then they are allowed to take a big bite out of it.

That bite has recently gone up from 25% to 32.5%, so this is a big deal and worth worrying about.

They’ve also got rules around paying it back. So if you borrow say £20,000 from your business and you pay it back and then within 30 days you borrow it again, then as far as HMRC are concerned you’ve never really paid it off at all, and then again this 30.5% kicks in.

So, what do you do? Well, the obvious thing to do in that case is if you have an overdrawn directors loan account. If you’ve borrowed money and haven’t paid it back, turn it into a dividend.

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If you need any help doing that, then give us a call and we can help you with that.

So understand that borrowing money from your own company is not without consequences. There are rules around it. You need to get the director’s loan account under control. You need to observe the rules and pay the money back if that’s what you’re going to do, or you need to make sure that any loan gets translated into dividends and that needs to be done properly to make sure you don’t pay more tax then you should do.

I hope this has been helpful and thanks for watching.

If you liked this blog post: Tax Treatment of the Directors Loan Account., then make sure to check out our last one: The most important business activities are…

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Tax Treatment of the Directors Loan Account