As a director, you have the right to take or give a loan to your company. However, there are certain rules you must follow and also adhere to the repayment deadlines if you’ve taken a loan from your company.
If you’re starting a company, as a director you may give your company a loan from your personal account. After the company is back on its feet, you can take the loan amount back without any obligation to pay tax or NI, as you do not have to pay tax on your money twice.
And the other scenario, when you as a director are taking a loan out of the company, you do hold certain obligations in repaying it, in order to avoid paying excess tax on the loan taken (this is usually 9 months and 1 day after the company’s year-end at the latest). All Director’s Loans taken out need to be recorded in the Director’s Loan Account (DLA). If you’re taking out more than £10,000, the company must treat this as a benefit-in-kind and this must be reported on your self-assessment tax return.
The term ‘Bed and breakfasting’ is connected to the practice where another loan is taken out within 30 days after repaying the previous one, and HMRC will consider this as tax avoidance. Even if you are compliant with the 30-day rule, there is no guarantee HMRC will be satisfied if you’re taking out loans too often.
Note that if the loan is ‘written off’ or ‘released’, the company will be obliged to deduct Class 1 National Insurance contributions through the payroll and that you as a director will need to pay Income Tax on the loan through Self-Assessment Tax. To see the impact a Director’s Loan could have on your Corporation Tax, click here.