{"id":7944,"date":"2020-07-11T18:53:09","date_gmt":"2020-07-11T17:53:09","guid":{"rendered":"https:\/\/www.qualitycompanyformations.co.uk\/blog\/?p=7944"},"modified":"2024-11-08T12:39:04","modified_gmt":"2024-11-08T12:39:04","slug":"directors-loan","status":"publish","type":"post","link":"https:\/\/www.qualitycompanyformations.co.uk\/blog\/directors-loan\/","title":{"rendered":"What is a director\u2019s loan and how much tax is paid on it?"},"content":{"rendered":"      <div class='post-lastupdated'>\r\n        <strong>Last updated: 8 Nov 2024<\/strong>\r\n      <\/div>\r\n    \n<p>There are various ways for directors to take money out of their business, including dividend payments, drawing a salary through PAYE, and claiming expenses. Another method, which we will consider in this blog post, is using a director&#8217;s loan.<\/p>\n<h2 id=\"how-does-a-directors-loan-work\">How does a director\u2019s loan work?<\/h2>\n<p>A <a href=\"https:\/\/www.gov.uk\/directors-loans\" target=\"_blank\" rel=\"noopener noreferrer\" data-wpel-link=\"external\">director&#8217;s loan<\/a> is defined as any money that a director or close family member receives from a company that is not a salary, dividend, expense repayment, or money they\u2019ve previously paid into or loaned to the company.<\/p>\n<p>Although a director\u2019s loan is not considered to be a payment in the same way as salary income or dividends, accurate records must be retained. This is because directors&#8217; loans are subject to their own tax rules. These records are known as a director\u2019s loan account (DLA) or a director\u2019s current account.<\/p>\n<h2 id=\"what-should-be-recorded-in-a-directors-loan-account\">What should be recorded in a director\u2019s loan account?<\/h2>\n<p>The key information that should be recorded in a DLA includes:<\/p>\n<ul>\n<li>money borrowed from the company by a director<\/li>\n<li>personal bills of a director that have been paid by the company<\/li>\n<li>any repayments of a director\u2019s loan<\/li>\n<li>money owed by the company to the director (e.g. salaries and dividends)<\/li>\n<\/ul>\n<p>A DLA is essentially a balance sheet that details all the transactions between a limited company and its directors.<\/p>\n<h2 id=\"what-tax-must-be-paid-on-a-directors-loan\">What tax must be paid on a director&#8217;s loan?<\/h2>\n<p>Depending on the amount borrowed and how the loan is settled, a combination of personal tax and Corporation Tax may need to be paid in respect of directors\u2019 loans.<\/p>\n<p>If the entire loan is repaid within nine months of the end of the <a href=\"https:\/\/www.gov.uk\/corporation-tax-accounting-period\" target=\"_blank\" rel=\"noopener noreferrer\" data-wpel-link=\"external\">Corporation Tax accounting period<\/a>, there is generally no tax to pay (although see below regarding \u2018bed and breakfasting\u2019).<\/p>\n<p>Any overdue payments will be subject to section 455 Corporation Tax at 33.75% of the outstanding amount. This tax rate is always in line with the dividend tax higher rate.<\/p>\n<h4 id=\"loans-over-10000\">Loans over \u00a310,000<\/h4>\n<p>If a DLA exceeds \u00a310,000 it will be considered a \u2018<a href=\"https:\/\/www.gov.uk\/expenses-and-benefits-loans-provided-to-employees\" target=\"_blank\" rel=\"noopener noreferrer\" data-wpel-link=\"external\">benefit in kind<\/a>\u2019, which must be reported on the director\u2019s Self Assessment tax return. Tax may need to be paid on the loan at the official rate of interest (3.75%). Furthermore, the company will need to pay employer <a href=\"https:\/\/www.gov.uk\/guidance\/rates-and-thresholds-for-employers-2025-to-2026\" data-wpel-link=\"external\" target=\"_blank\" rel=\"noopener noreferrer\">Class 1A National Insurance contributions<\/a> (currently 15% for the 2025-26 tax year) on the full amount of the loan.<\/p>\n<h4 id=\"interest-rates\">Interest rates<\/h4>\n<p>If interest has been paid on the loan below the <a href=\"https:\/\/www.gov.uk\/government\/publications\/rates-and-allowances-beneficial-loan-arrangements-hmrc-official-rates\/beneficial-loan-arrangements-hmrc-official-rates#average-official-rates\" target=\"_blank\" rel=\"noopener noreferrer\" data-wpel-link=\"external\">official rate of interest<\/a>, the discounted interest will be classed as a benefit in kind and should be reported on the personal tax return. In this case, tax may need to be paid in respect of the difference between the official rate and the discounted rate.<\/p>\n<h2 id=\"what-is-bed-and-breakfasting\">What is \u2018bed and breakfasting\u2019?<\/h2>\n<p>If a director\u2019s loan is repaid within the nine-month period but is immediately taken out again, this is known as \u2018bed and breakfasting\u2019.<\/p>\n<p>In the past, some directors indulged in bed and breakfasting routinely as a way of avoiding tax. But tax rules were tightened up to deny any tax relief in respect of directors\u2019 loans used in this way.<\/p>\n<p>The rules are quite complex, so professional advice should always be sought in this matter.<\/p>\n      <div class=\"shortcode shortcode-image\">\r\n        <a href=\"https:\/\/www.qualitycompanyformations.co.uk\/fully-inclusive-package\/\" data-wpel-link=\"internal\">\r\n          <img decoding=\"async\"\r\n            src=\"https:\/\/cdn-quality.s3.eu-central-1.amazonaws.com\/assets\/custom\/images\/blog\/qcf-blog_sidebar.png?v=4\"\r\n            alt=\"Fully Inclusive Package\"\r\n            class=\"md:hidden\"\r\n            loading=\"lazy\"\r\n          \/>\r\n          <img decoding=\"async\"\r\n            src=\"https:\/\/cdn-quality.s3.eu-central-1.amazonaws.com\/assets\/custom\/images\/blog\/qcf-blog_banner.png?v=4\"\r\n            alt=\"Fully Inclusive Package\"\r\n            class=\"hidden md:block\"\r\n            loading=\"lazy\"\r\n          \/>\r\n        <\/a>\r\n      <\/div>\r\n    \n"},"excerpt":{"rendered":"<p>There are various ways for directors to take money out of their business, including dividend payments, drawing a salary through PAYE, and claiming expenses. Another method, which we will consider in this blog post, is using a director&#8217;s loan. How does a director\u2019s loan work? A director&#8217;s loan is defined as any money that a [&hellip;]<\/p>\n","protected":false},"author":10,"featured_media":7942,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[1239],"tags":[],"class_list":["post-7944","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-tax-accounting-finance"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v24.9 (Yoast SEO v24.9) - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>What is a director\u2019s loan and how much tax is paid on it?<\/title>\n<meta name=\"description\" content=\"Find out what a director&#039;s loan is, how it works and what tax is paid on it. We also discuss what should be recorded in a director&#039;s loan account and more.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.qualitycompanyformations.co.uk\/blog\/directors-loan\/\" \/>\n<meta property=\"og:locale\" content=\"en_GB\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"What is a director\u2019s loan and how much tax is paid on it?\" \/>\n<meta property=\"og:description\" content=\"Find out what a director&#039;s loan is, how it works and what tax is paid on it. We also discuss what should be recorded in a director&#039;s loan account and more.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/www.qualitycompanyformations.co.uk\/blog\/directors-loan\/\" \/>\n<meta property=\"og:site_name\" content=\"Quality Formations Blog\" \/>\n<meta property=\"article:published_time\" content=\"2020-07-11T17:53:09+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2024-11-08T12:39:04+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/www.qualityformationsblog.co.uk\/wp-content\/uploads\/2020\/07\/Loan.jpg\" \/>\n\t<meta property=\"og:image:width\" content=\"1500\" \/>\n\t<meta property=\"og:image:height\" content=\"750\" \/>\n\t<meta property=\"og:image:type\" content=\"image\/jpeg\" \/>\n<meta name=\"author\" content=\"Nicholas Campion\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"Nicholas Campion\" \/>\n\t<meta name=\"twitter:label2\" content=\"Estimated reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"3 minutes\" \/>\n<!-- \/ Yoast SEO Premium plugin. -->","yoast_head_json":{"title":"What is a director\u2019s loan and how much tax is paid on it?","description":"Find out what a director's loan is, how it works and what tax is paid on it. 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We also discuss what should be recorded in a director's loan account and more.","og_url":"https:\/\/www.qualitycompanyformations.co.uk\/blog\/directors-loan\/","og_site_name":"Quality Formations Blog","article_published_time":"2020-07-11T17:53:09+00:00","article_modified_time":"2024-11-08T12:39:04+00:00","og_image":[{"width":1500,"height":750,"url":"https:\/\/www.qualityformationsblog.co.uk\/wp-content\/uploads\/2020\/07\/Loan.jpg","type":"image\/jpeg"}],"author":"Nicholas Campion","twitter_misc":{"Written by":"Nicholas Campion","Estimated reading time":"3 minutes"},"schema":{"@context":"https:\/\/schema.org","@graph":[{"@type":"WebPage","@id":"https:\/\/www.qualitycompanyformations.co.uk\/blog\/directors-loan\/","url":"https:\/\/www.qualitycompanyformations.co.uk\/blog\/directors-loan\/","name":"What is a director\u2019s loan and how much tax is paid on it?","isPartOf":{"@id":"https:\/\/www.qualitycompanyformations.co.uk\/blog\/#website"},"primaryImageOfPage":{"@id":"https:\/\/www.qualitycompanyformations.co.uk\/blog\/directors-loan\/#primaryimage"},"image":{"@id":"https:\/\/www.qualitycompanyformations.co.uk\/blog\/directors-loan\/#primaryimage"},"thumbnailUrl":"https:\/\/www.qualityformationsblog.co.uk\/wp-content\/uploads\/2020\/07\/Loan.jpg","datePublished":"2020-07-11T17:53:09+00:00","dateModified":"2024-11-08T12:39:04+00:00","author":{"@id":"https:\/\/www.qualitycompanyformations.co.uk\/blog\/#\/schema\/person\/55c0555d374a517d89f4b8526550af9e"},"description":"Find out what a director's loan is, how it works and what tax is paid on it. 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