Many small business directors find themselves in a position where they want to borrow money from their cash rich businesses.
It’s tempting to draw down funds using their Director’s Loan Account (DLA), however, many do so without fully understanding the potential tax consequences.
Is the loan affordable?
The first consideration to make is whether the business can afford to make the loan. The cash may be sitting in the company bank account, but is it needed as working capital to pay upcoming liabilities such as trade creditors, or VAT, PAYE and Corporation Tax?
Length of the loan
The second consideration to make is the length of time needed to realistically repay the DLA.
If the loan remains outstanding nine months after the end of your Corporation Tax accounting period, the business is liable to pay Section 455 tax at 32.5% on the total loan outstanding at the nine months date. This can be a significant cash flow hit to the business.
S455 tax would, however, be repaid to the business nine months after the accounting period in which the loan is repaid.
Benefit in Kind
The third consideration to make is loan interest. You could opt to pay no interest on the loan and, providing the total loan does not exceed £10,000 at any point in the year, there would be no personal tax consequences.
If the loan does exceed £10,000 at any point and you paid the company interest below the official rate (currently 2.5%), this would be deemed a Benefit in Kind and you may need to pay tax and National Insurance on the difference.
Writing off the loan
If the business decides to write off the loan instead of you repaying it, the amount written off would be subject to Income Tax through a Self-Assessment Tax Return.
If you require further advice about an existing or proposed DLA, please contact Martin Frain at email@example.com or call 0161 703 2500.