As business accountants, we spend all day helping business owners with their limited companies.
One area we spend a lot of time explaining is how the ‘Directors Loan Account’ works.
All money you take out of the business goes into this account. Your dividend and salary then come out of this.
So, how can you enjoy £10,000 tax-free from your company?
With all things tax, there are very specific rules.
For simplicity, we’ve kept the example simple here, presuming you are the sole owner (shareholder) and director of the company. Do check with an accountant on your specific circumstances.
A reminder on the basics of a Director’s Loan Account
Any time you take money out that isn’t salary, dividend or expense repayments, you owe that money back to the company.
Hence the term ‘directors loan’. Sometimes your company can owe you money, which is often the case in the early days when you may put in some money to get it going.
Taking back any money owed to you is tax-free.
This is where really good book-keeping can save you money, as you can understand what is actually owed to you, or you owe the company, at any exact time.
The tip here is you can actually borrow up to £10,000 from your company without paying any tax.
Why might I do this?
This can be useful for short term loans, or sometimes for saving a little bit of tax. For example, if you are near the £50,000 a year ‘basic rate’ limit (20/21) as you approached the tax year-end, where you could end up paying 32.5% on your dividends instead of 7.5%, borrowing the money until the next tax year may save tax.
If you were to borrow over £10,000 there is usually a ‘benefit in kind’ tax on the money, as it is a interest free loan. HMRC set the £10,000 limit. It’s possible to borrow over £10,000 and not pay benefit in kind tax, by your company charging interest, but that’s a whole another blog!
So how do I pay it?
In terms of actually taking the money, you’d just pay it to yourself and ear mark it in your accounts as a director’s loan. Obviously, you should consider if you actually can spare that cash before doing it!
It doesn’t have to be exactly £10k either, that’s the upper limit.
So hit me with it, what’s the catch?
The ‘trap’ in this tip is when you borrow it you start a clock ticking. It’s tax-free, up to the point that is ~9 months after your company year-end. If at that point you owe any money to the company, you have to pay HMRC a ‘holding’ tax of 32.5% of the balance until you repay it. This is to stop people just taking tax-free director loans and never repaying them!
As an example of the time limit, let’s say your company year-end it 31 December. If you took a loan on the 31st December 20, you have until roughly the end of September 2021 to repay this loan, either by actually repaying it with cash, or more usually repaying with a declared dividend from profits you’ve made (paperwork exercise).
If you took the loan out on 1st Jan (so into the next company year), you would actually have until the end of September 2022 to repay it – an additional year.
Timing is important.
Just to clarify the point on declaring a dividend, what that means is that presuming you’ve made enough profit in your accounts, you are officially declaring some of the profits in your name and offsetting them against that loan. This is a tricky technical bit so you be discussed with your accountant.
You may think, well can I just repay the loan with some cash and take it straight back out again? Sadly no, there are some very specific anti-tax avoidance rules that prevent this.
As you can see, this allows you to enjoy £10,000 extra for quite some time, and gives you the ability to time when you actually would get taxed on this money.
One final word of warning – be sure the company is in a position to lend you this money – in the worst case scenario where the company fails, you will be asked to repay that money to help pay any debts the company has.
So there you go, how to enjoy £10,000 tax free for a while!
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If you have any specifics questions around your circumstances, book a consultation with us on 02392 240040.