How to borrow money from your Limited Company and the associated tax risks

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How to borrow money from your Limited Company and the associated tax risks
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How to borrow money from your Limited Company and the associated tax risks

You may find that from time to time you’ll need to borrow money from your Limited Company, so how do you go about doing so, what are the risks and is there anything you need to be aware of?

In this blog we explore all that, to help you understand the process and associated risks before taking money from your company.

How does it work?

Regardless of the loan period or amount being borrowed, the first thing you’ll need to know is how much money is in your business bank account, so that you’ll know how much you have in order to account for tax, staffing costs, and any other business depreciation costs.

Legally taking money out of your Limited Company

There are various ways in which you can take money out of a Limited Company, including:

  1. By paying yourself a director’s salary
  2. By issuing dividend payments from available profits within the company
  3. In the form of a director’s loan
  4. By claiming expenses for business-related items

A Director’s Salary

Most Limited Company Directors will pay themselves a salary through PAYE. Depending on the amount you wish to pay yourself, you might need to pay National Insurance Contributions (NICs), and/or income tax. All salary payments are a tax deductible expense, therefore your company won’t have to pay any Corporation Tax liability on this money. Your company will however, still need to pay 15.05% Employer’s NICs on any salary earnings that fall above the NIC Secondary Threshold of £9,100 (for the 2022/23 tax year).

Paying yourself a salary up to the NIC Secondary Threshold of £9,100 means you won’t have to pay income tax or NI. This value still allows you to qualify for the State Pension and any benefit entitlements, as your income exceeds the Lower Earnings limit of £6,396 per annum.

Another popular salary level taken by Directors is the tax-free Personal Allowance of £12,570, whereby you won’t be liable to pay Income Tax, but you will need to pay Employee NIC contributions on any earnings between the values of £11,908 and £12,570.

Dividend Payments

As a shareholder of a Limited Company, you’re able to take profit from the company in the form of a dividend. You can only do so if there is profit in the company, otherwise the dividend will be classed as ‘illegal’.

The total amount you’re able to pay yourself is dependent on the number of shares you hold, so for example if you hold 100% of the shares you’re able to take the remainder of profit out of your company after all costs have been accounted for (ie tax, expenses, etc).

All Limited Companies must pay 19% Corporation Tax on taxable income (this is going to increase to 25% for all profits in excess of £250,000 from 1 April 2023). The first £2,000 of annual dividend income is taxed at 0%, and free from NICs and Income Tax. Any amount above the £2,000 limit is then subject to dividend tax that’s based on your Income Tax band (basic, higher or additional rate tax).

Before paying out a dividend you have to declare it to the board, and ensure you make a record of the meeting’s minutes. This provides a solid paper trial of which activity took place and when, the amounts that were issued and to whom. You’re also required to keep a copy of the dividend voucher, which shows a record of the dividend’s details.

Director’s Loan

By taking out money from your Limited Company in the form of a Director’s Loan, you’re able to:

  1. Lend money back to your Limited Company
  2. Borrow more money from your company than the amount you originally paid in
  3. Reclaim any money you originally paid into the company

A record of Director’s Loans must be maintained and kept in a Director’s Loan Account, which has to be shown as part of your company’s balance sheet.

It’s worth understanding that if you decide to take out money that has been paid into your business, your Director’s Loan Account will become overdrawn, and there are associated tax implications from doing so. If your company owes you money, then your loan account will be in credit and you’re able to take out money without facing any tax liabilities.

For example – if you owe your Limited Company less than £10,000:

  • There’s no personal tax liabilities, but there could be tax consequences for your Limited company if your loan is overdrawn for more than 9 months following your company’s yearend (your company’s filing deadline). If this is the case, the company must pay Section 455 Tax on the full amount overdrawn
  • Section 455 Tax carries a 33.75% tax charge (32.5% for loans prior to 06/04/2022) which your company is liable to pay alongside its Corporation Tax liability
  • Any outstanding loan amounts must be displayed on your company’s tax return

If the amount you owe your company is more than £10,000 at any point:

  • There could be tax consequences for your company if your loan is overdrawn for more than 9months from your company’s yearend. If this happens the company must pay Section 455 Tax on the full amount overdrawn
  • Section 455 Tax carries a 33.75% tax charge (32.5% for loans prior to 06/04/2022) which your company is liable to pay alongside its Corporation Tax liability
  • You must display any outstanding loan amounts on your company’s tax return
  • When a Director’s Loan amount exceeds £10,000, if you repay the loan to the company with interest applied (at HMRC’s interest rate), the loan won’t be classed as a taxable benefit
  • If the loan isn’t repaid to the company with interest you’ll need to declare it via your company P11D and your Self-Assessment Tax Return. This is because it’s classed as benefit in kind (BiK) for the Director to receive a loan interest-free from the company
  • The value of the benefit will be calculated at the official rate of interest. Class 1A National Insurance at 15.05% will then be payable from your company via form P11D and the benefit will also be included within your personal tax return, taxed at your appropriate rate of tax

What you need to record when it comes to Director’s Loans:

  • The value of money a Director gives the company, excluding any share payments they may take
  • The total value a Director may borrow from the company
  • Any interest that may be payable on that loan

These records are usually kept within the Director’s Loan Account. Depending on how much money is borrowed, it may be subject to certain types of tax, and therefore it’s strongly advisable to discuss your plans with your Taxevo Accountant before borrowing any money from your Limited Company.

If your Director’s Loan Amount has zero balance or is in credit

If the amount you withdraw is less than the total balance you’ve put in, you’re not borrowing any money, and are therefore claiming funds you’ve already paid in.

The Director’s Loan Account will either show a balance of nil or remain in credit, depending on the total amount of money you draw out. You’re able to take out the available money at any given time without any tax implications, so long as your account is in credit.

What happens when your Director’s Loan Account is overdrawn?

If you withdraw more than what’s already in there (discounting a salary payment, dividend or expense), the withdrawal is a benefit and will therefore be classed as a Director’s Loan. This will in effect make your Director’s Loan Account overdrawn.

Your Limited Company’s financial year

If your account remains overdrawn for 9 months or more after the end of the accounting period, then HMRC will charge you S455 Tax at a rate of 33.75% (32.5% for loans prior to 06/04/2022). You’re able to claim this tax paid back once you’ve repaid the loan in full to your Limited Company.

Expenses

So long as expenses were made wholly and exclusively for the usage of your Limited Company, you’re able to reclaim the cost of expenses. You must keep all your receipts, in order to do so. You’re able to claim tax-free deductible expenses in the form of:

  • Parking and mileage costs
  • Travel and accommodation
  • Mobile phone contract costs
  • Entertainment
  • Food and drink
  • Computer and office equipment
  • Training costs
  • Postage costs

For all expenses personally incurred on behalf of the business, your company will reimburse you when you’re paid either weekly or monthly, or at another time that’s convenient to you. Your company must keep all expenses receipts for a period of 6 years along with a record of what the expense was, what it was for and how much it cost.

How your Taxevo Accountant can help

Tax is confusing, especially when it comes down to working out your % margins, what taxes are due and when, and how much extra you could end up paying if you get your numbers wrong. That’s where your expert Taxevo Accountant comes in hand, to help you navigate the complex world of running your Limited Company. If you’re considering borrowing money from your company get in touch with your accountant today.

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