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Borrowing from company increases tax liability

When a director of a company takes money from the company other than salary and expenses, there is a risk of 32% tax payment. You must keep clear records of all transactions between director and the company.

When you are thinking of borrowing money, your first thought is usually let’s borrow from personal or family company. This is because you may feel it is an attractive source of cheap finance. This is possible as you can borrow up to £10,000 for 21 months without any tax consequences. The only fact that you need to be aware about is if the directors account is overdrawn at the end of the accounting year, there may be consequences if the company if it is a close company. If you loan was to exceed £10,000 at any point of the year, there may be a benefit in kind tax charge.

If the director’s account is overdrawn, the director is regarded as having a loan from the company. This can be for many reasons. For example, the company has lent the director money, or the company has paid personal bills on behalf of the director. There are tax consequences to consider when the account is overdrawn. This depends on whether the loan is still outstanding on the due date of the corporation. If the loan remains outstanding on this date, then the company must pay tax. This rate is 32.5%. This is payable with the company’s corporation tax for the period, but not at the same time as the corporation tax.

If the loan is cleared before the trigger date but after the accounting period, there is no section 455 tax to pay but the company must notify HMRC. If the loan is cleared before the account period there is nothing to report.

Clearing the loan will depend on the circumstances. For example, it can be cheaper to pay at 32% rather than pay a higher rate tax for 40% plus national insurance should a bonus paid to clear the loan.

To find out more about Directors Loan Accounts please contact us at Sterling Finance on 0161 339 4989 or email info@sterlingfinance.net.