HMRC offers a directors' loan accounts toolkit (PDF) which can help you to manage any directors' loans that you take from your company.
This toolkit is designed to help anyone completing a company tax return avoid the common errors relating to directors' loan accounts. It can be used for the previous four tax years.
What is a director's loan?
When you take money from your company that is not a salary, dividend or expense repayment it's called a director's loan. You must keep a record of any money you borrow from or pay into the company; this is called a director's loan account (DLA). Each director of the company must have their own DLA. You'll need to include details of these DLAs in your annual accounts.
When should you use a director's loan?
Directors' loans involve extra administration and they can increase your tax bill so they should not be used unless absolutely necessary. However, they can be useful if you need to pay for one-off expenses or unexpected bills.
Do you have to pay tax on a director's loan?
You'll need to repay a director's loan within nine months and one day of the company's year-end if you want to avoid paying tax on it. Otherwise, any unpaid balance will be taxed at 32.5% as part of corporation tax. This is payable even if the company is making a loss and there is no corporation tax to pay.
Common pitfalls with directors' loans
HMRC looks closely at directors' loans because there is a lot of potential for error in director's loan accounts. The HMRC toolkit highlights some of these risks. It's vital to keep accurate records and ensure you have allocated loans and personal expenses correctly. It's also important to note that if the director's loan account balance exceeds £10,000 at any point in the tax year, a benefit in kind charge will arise on the loan unless the director pays interest on it.