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Directors' Loans

27 - 04 - 2021

What is a Directors’ Loan?

 

Where a director removes funds from his company which are not for recorded and/or taxed payments, i.e. wages, expenses and dividends, the value is treated in the company accounts as a loan to the director.



Is there any personal tax liability?

 

Cumulative loans amounting to over £10,000 at any time during the tax year must be recorded as a Benefit in Kind on a P11d form submitted to HMRC by 6 July each year. The benefit is calculated as the interest the director or employee would have incurred if the loan had been made on a commercial basis. HMRC dictate the interest rate to be used, currently 2.5%, (before 06.04.2018 2.5%) to calculate the benefit. Any interest paid by the director or employee to the company is deducted from the interest that should have been charged. Interest is calculated on a daily basis.

 

For Example:

 

Mr A borrows £15,000, on 6 April 2021, from Company B Ltd of which he is a director. HMRC interest rate for beneficial loans is 2.5% for the whole tax year. Mr A pays B Ltd £10 per month interest.

Beneficial Interest £15,000 x 2.5% X 12/12 = £375.00

Interest Paid £10 x 12 = £120

Benefit in Kind £375 - £120 = £255.00

Personal Tax liability:

Basic rate 20% is £51.00. Higher rate 40% is £102.00

 

Is there any company tax liability?

 

S455 CTA 2010

 

Any loan outstanding at the year end and still outstanding at the date the corporation tax liability is due, 9 months and one day after the year end, will incur a tax liability of 32.5% of the loan outstanding. The tax is referenced as section 455 tax in the CT600.

 

For Example:

 

Mr A borrows £10,000, on 6 April 2021, from Company B Ltd of which he is a director. Outstanding Loan at year end £10,000

Tax liability £10,000 x 32.5% = £3,250

The S455 tax is refundable 9 months and 1 day after the end of the accounting period in which the loan is repaid.


 

Class 1A National Insurance Contribution

 

Employers’ National Insurance is due on the benefit received by the director or employee. Class 1A National Insurance is calculated at 13.8% of benefit and is due by 19 July following the end of the tax year to which they relate.

 

For Example:

 

Mr A borrows £15,000, on 6 April 2021, from Company B Ltd of which he is a director. HMRC interest rate for beneficial loans is 2.5% for the whole tax year. Mr A pays B Ltd £10 per month interest. Mr A’s Benefit in Kind is £255.00.

Company B Ltd’s Class 1A NIC liability is £255.00 x 13.8% = £35.19

 

If you would like to discuss any of the issues noted above please contact us on:

 

01244 625 500 or 01978 364 000

contactus@foremansllp.com

 

Whilst all due care and attention has been taken in the preparation of these notes no liability

can be accepted for any omission or item contained therein.

 

Foremans LLP

April 2021



 

 

 

 

 

Foremans LLP Umberlla
Foremans LLP