October 20, 2022
by  Josh Sab

Director’s Loan (DLA) - What is it and how to use it?

Key terms:

Close Company: A limited company with five or fewer 'participators', or a limited company in which all the 'participators' are also directors.

Participator: A person with a material interest in the company, e.g shareholders with more than 5% shares/voting rights.

 

What are the tax implications if a director/participator in a close company takes a loan from the company? 

If a director/participator has taken a loan from their own limited company the company may be liable to pay corporation taxes (known as S455 taxes) at the rate of 32.5%. In addition, if the loan is above £10,000 (Before April 16 - the threshold was £5000) and no interest is paid by the borrower, then the interest will be considered as a benefit in kind and Class 1A NI should be paid on P11D. Let’s discuss this in more detail with a few examples. 

*- There are certain exceptions for a director working full time that does not have a material interest in the company.

 

For clarity, we'll explain the potential scenarios with an example, read through them and see which one may apply to your circumstances.

A Ltd is a close company owned by Mr A, a director. The company’s accounting period is 01.01.2020 - 31.12.2020.

Example 1

  • Mr A decides to take a loan from the company for £5000.00 on the 1st of November 2020 and he pays back the loan on the 31st of march 2021.
    • In this instance, Mr A has taken a loan which is less than £10,000. So, there is no NI (P11D) payable.
    • He has also settled the loan within 9 months from the company’s year-end. (9 months will be - 30th of September 2021). So, there are no S455 taxes to be paid either. 

Example 2

  • Mr A decides to take a loan from the company for £5000.00 on the 1st of November 2020 and he pays back the loan on the 01st of October 2021.
    • In this instance, Mr A has taken a loan which is less than £10,000. So, there is no NI (P11D) payable.
    • He has not settled the loan within 9 months from the company’s year-end. (9 months will be - 30th of September 2021). So, the company will have to pay 32.5% S455 taxes to HMRC in their corporation tax return. This will be £5000 x 32.5% = £1625.00

Example 3

  • Mr A decides to take a loan from the company for £11000.00 on the 1st of November 2020 and he pays back the loan on the 01st of October 2021.
    • In this instance, Mr A has taken a loan which is more than £10,000. In this scenario, Mr A has two options, 
      • Pay interest to the company at 2.5% (HMRC Official interest rate) or Mr A will have to pay income tax and the company will have to pay class 1A National Insurance (13.8%). This will be dealt with by filing a P11D. Whether the loan is repaid within 9 months is irrelevant here and the P11D taxes are still applicable if the loan is more than £10,000
      • He has not settled the loan within 9 months from the company’s year-end. (9 months will be - 30th of September 2021). So, the company will have to pay 32.5% S455 taxes to HMRC in their corporation tax return. This will be £5000 x 32.5% = £1625.00

Example 4

  • Mr A decides to take a loan from the company for £5000.00 on the 1st of November 2020 and he pays back the loan on the 01st of September 2021 and takes another £5000 loan on the 20th of September 2021.
    • In this instance, Mr A has taken a loan which is less than £10,000. So, there is no NI (P11D) payable.
    • Even though he has settled the loan within 9 months from the company’s year-end (9 months will be - the 30th of September 2021), the company still will have to pay the S455 taxes as the new loan is taken within 30 days of settling on the old loan. (this practice is called “bed and breakfasting” - This was introduced to avoid people abusing the legislation)

 

Frequently Asked Questions

Why does the director ( participator) take a dividend instead of a loan?

There could be multiple reasons for this: 

  • If the director needs extra funds for the short term and if the dividend will move the director into a higher rate income tax threshold, it may be worth taking a loan and settling it back. If the money is taken as a dividend, the director will be personally paying the taxes and this will not be refunded. However, if a loan was taken by the director and this is settled with the company, HMRC will refund the S455 taxes.
  • Dividends can be taken only if the company has made a profit or has retained earnings. If there are no sufficient retained earnings/profits - then dividends are not an option.

What happens to the S455 taxes paid to HMRC by the company?

  • Once the loan is settled (paid back to the company by the director), HMRC will refund the S455 taxes paid to them. The loan must be settled within 4 years to claim the taxes back.

What if the director cannot pay back the loan?

Companies can write off the loans given to the directors. However, there will be tax implications on the write-off.

  • Director will have to pay taxes on the written-off loans through the Self Assessment system.
  • Companies will have to report this on P11D and pay Class 1A NI.

 

Directors’ loans are a complex area and we strongly recommend you get some professional advice, especially if you have any outstanding directors’ loans or intend to take any loans from your company.

As Accountants and Tax advisors, we are always here to help. Please contact us at finance@pfconsult.co.uk or by telephone on 020 8004 9727.

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