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 owed 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.
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 at 32.5% of the outstanding amount.
Therefore, in the example above, if you still owed your company £5,000 at the 31st December, £1,625 would be payable to HMRC.
The amount paid 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 £1,625 back until the 1st of January the following year.
The rule also applies to other shareholders, even if they aren’t directors.
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!
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 on an annual P11d form and pay tax on the calculated benefit. We can take care of the preparation and filing of the necessary forms for you.
As an example, if you owed your company £20,000 throughout all the tax year and the loan was interest-free, assuming you are a basic rate taxpayer, an additional tax of £80 would be due personally (declared on your annual self-assessment tax return). Your company would also have to pay £55.20 in Class 1A National Insurance (by the 22nd of July following the end of the tax year).
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 the points discussed above 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.