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TonyTax
TonyTax, Tax Consultant
Category: Tax
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Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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what are the advantages or disadvantages on directors loans,

Resolved Question:

what are the advantages or disadvantages on directors loans, is there a min or maximum pay back period, are they subject to additional tax on current earnings, ive asked my company bookkeeper but he seems very nervous.
Submitted: 2 years ago.
Category: Tax
Expert:  TonyTax replied 2 years ago.
Hi.

You can find all the information you need on director's loans from both the company's point of view and the director's point of view here and here.

As you will see there can be corporation tax and national insurance contributions implications for the company and income tax implications for the director depending on the size of the loan, how long it is outstanding for and when it is repaid.

As far as advantages are concerned, they can be a cheap way to borrow money, especially for short periods. I've know director/shareholders use a short term loan to pay an unexpected bill instead of taking a dividend which may have higher rate tax implications for the director. The trick is to repay the loan to avoid the corporation tax consequences. The main disadvantages are the tax liabilities which can occur when a loan is not repaid in line with the time limits set by HMRC.

I hope this helps but let me know if you have any further questions.
Customer: replied 2 years ago.

when is the time limit you refer to too, on the payback, ideally I would want to pay back over say over 10 years I presume this would not make sense to do so..i basically want to use the company cash to pay off a mortage on a premises I own, so I can receive the month income from it.., without the larger mortgage payment. And free up some cash per month. But not use my own...im already paying 33/40 tax on income/directors dividends plus other income....would this additional taxation be personnel or company..thanks

Expert:  TonyTax replied 2 years ago.

If a loan to a director is not repaid within nine months and one day of the end of the accounting period during which it was taken out, the company will have to pay a one off Section 455 tax charge at 25% of the outstanding balance along with its regular corporation tax liability.

Look under the heading "Reclaiming Corporation Tax after your director’s loan has been repaid" here for information on claiming repayment of the Section 455 tax charge.

As far as your personal tax situation is concerned, you will have to pay tax on a benefit in kind annually if the loan or the totla of all loans outstanding is for £10,000 or more which you can read about here and you pay interest to outstanding he company at below the official rate which is currently 3.25%.

The company will also have to report the loan on a form P11D and pay Class 1 NIC on the taxable benefit annually at 13.8%.

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