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Free Guides for new and growing businesses from HRBS - fixed fee accountants and business advisors

Loans to directors

loans to directors Loans to directorsThe good news … a company can loan a director up to £10,000 without shareholder approval.

The bad news … HMRC consider interest free loans to directors as benefits in kind.

Where the loan (or total if more than one loan) is over £5,000 the benefit (interest), calculated at the HMRC official interest rate (currently 4% pa) is taxable and must be reported on form P11d by 6th July and included in the director’s personal tax return.

If the director pays the company interest (minimum 4% pa), there is no benefit in kind.

The loan must be repaid within 9 months after the company’s year end, otherwise the company must pay corporation tax on the loan which will only be refunded if the loan is repaid. Unfortunately the tax is not actually refunded as it is offset against the company’s corporation tax liability for the accounting period in which the loan is repaid. This is obviously not good for the company’s cashflow. Further information is available on HMRC’s website.

If done correctly, loans to directors are a useful tax planning exercise and are often used for home deposits, weddings etc . The loans are repaid using dividends and as mentioned on other guides here at tips.HRBS.biz , the company must have sufficient profits (after tax and all costs) to pay dividends, so taking advice is essential before borrowing from your company.

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