Need a cash boost?
It happens to all of us, we need extra money for home extensions, unexpected life events or just a temporary cashflow glitch. You may have an opportunity that is available right now – and may not be in the future, when you’ve actually got enough money to afford it – for instance, a builder being available to do your extension much earlier than you’d planned, but is offering a ‘bite-his-hand-off’ discount, due to another customer letting him down.
What are your options?
You can put it on a credit card (and pay the very high interest rate until it’s paid off). You could have a chat with your friendly bank manager and get a loan (also attracting interest, although perhaps not quite so much). You could borrow it from a friend – but that’s never good for your friendship.
If you’re a business owner, partner or director – you could draw it as a dividend payment, but that may put you into a higher tax bracket – and you’ll pay tax on it.
However, there is another way your company can solve your problem. You could simply borrow it from your business through a Director’s loan account.
Why is this better than a bank loan?
Simply because you won’t pay tax on it, providing it’s under £10,000. Of course, the loan must be repaid to the company within nine months of the end of the accounting period in which you received the loan. As long as you do this here are no tax consequences on this loan for the company either.
For instance if your company has a 31st March year end and the company loaned you £10,000 on 1st April 2025, you would not need to repay this until 31st December 2026.
What if you need more than £10,000?
If the company loans you more than £10,000, as long as you pay interest to the company at the HMRC beneficial rate of 3.75% (from 6th April 2025) there is no benefit in kind on the loan either.
However, if you don’t pay the interest, you and your company will incur NI and tax, which will cost much more than this low interest rate.
What happens if you can’t repay it all on time?
Firstly, your company has to pay tax, under Section 455, at 33.75% on the outstanding amount. However, this is, effectively, a temporary tax, which can be reclaimed from HMRC once the loan has been repaid.
What else can a Director’s loan account be used for?
If you’re a small business, it’s often more practical to pay a minimum amount to your director(s) to benefit from the lowest tax obligations. However, most people need more than that to live on and use dividends to top up their income. If you do this monthly rather than annually, the drawings can be made through your Director’s loan account and the ‘sums’ done to work out any additional tax obligations and balance the profit & loss account at the end of the company’s financial year.
Using the Director’s loan account to assign personal out of pocket expense reimbursements will apply credits against any drawings, too. This reduces the total at the end of your financial year, so you don’t pay any more tax than you need to.
If you have any questions or just need some advice, then feel free to get in touch today and our expert team of chartered accountants will be more than happy to assist you!
