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When Do I Need To Pay Tax On My Director’s Loan?

If you’re the director of a company, you are both able to lend money to the company and borrow money from the company. Details of these transactions are kept in a Director’s Loan Account.

One of the reasons a director may opt to use a Director’s Loan is to pay personal expenses from the company and have the company owe them money for it.

At the end of the financial year, either you will owe money to the company, or the company will owe money to you. This must be recorded in the balance sheet as either an asset or a liability.

As long as the Director’s Loan Account is in credit (the company owes you money), there is no need to pay any tax on the balance. However, if the account is overdrawn at the end of your company’s financial year, you may need to pay tax.

When will I need to pay tax on my Director’s Loan?

Two people shaking hands with paperwork in front of them

If your Director’s Loan is overdrawn at your financial year-end, then it’s likely that you’ll need to pay tax on the balance.

However, if you are able to pay off the balance within nine months and one day of the year-end date, you won’t have to pay any tax.

If you haven’t been able to pay off the balance, the company will have to pay additional Corporation Tax on any amount of the Director’s Loan that is still outstanding. Currently, the rate is 33.75%, which is the higher rate of dividend tax (correct as of June 2022).

Once the company director has repaid the loan, HMRC can repay this tax to the company. However, this repayment isn’t automatic, and you will have to apply for it. You cannot submit a claim for repayment until nine months and one day after the end of the financial year. There is also a maximum reclaim period of four years from the end of the accounting period in which the repayment has been made or the loan was written off.

What is “bed and breakfasting”?

To put it simply, ‘bed and breakfasting’ is a term used to describe a situation in which the director aims to avoid paying tax on their Director’s Loan.

The director repays their loan in full before their financial year-end to avoid paying any tax on it. But then they immediately take out another loan. This can continue with the intention of the loan never being repaid.

To prevent the system from being used in such a way, HMRC has implemented a measure that when the director repays a loan of over £10,000, they cannot take another loan of £10,000 within 30 days. If this happens, the entire loan will be taxed.

There are some circumstances where you can still be taxed even if the additional loan is taken outside of the 30 days window. This happens when the loan being repaid is over £15,000, and at the time of repayment, there is an arrangement, or intention, to subsequently borrow £5,000.

Summing up

As you can see, there are a few different ways that you can be taxed on your Director’s Loan, and it can be easy to avoid being taxed. You just need to be careful when you are making your repayments and whether you have any plans to take another loan in the future.

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