You may from time to time wish to borrow money from your Limited Company. Whilst you are able to do so there are a number of considerations you need to be aware of, one of which is the tax implications of doing so.

In this blog we explore the process and what you need to know before moving any money.

The process

Whether you want to borrow money for a short or long period, in either a small or large amount, first things first – you’ll need to consider how much you have within your business account to pay for tax, any staffing costs, and other business depreciation elements.

As a director of your own Limited Company, it’s important to document any money taken from your company. This is done in the form of a Director’s Resolution, which is a formal record of how much was taken when and provides a solid paper trail for future reference. If your loan amount exceeds £10,000, under the Companies Act you must get approval from any of the other shareholders in writing.

Legally taking money out of your Limited Company

To legally extract money, you must do so only in one of the following ways:

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

Director’s salary

Many Limited Company directors pay themselves a small, regular salary through HMRC’s PAYE system. Depending on how much you pay yourself, you may have to pay National Insurance Contributions (NICs) and/or Income Tax. As salary payments are a tax-deductible expense, your company will not have any Corporation Tax liability on this money. That being said, your company will still need to pay 13.8% Employer’s NICs on any salary earnings that fall above the NIC Secondary Threshold of £8,840 (for the 2021/22 tax year).

You may wish to pay yourself a salary up to the NIC Primary Threshold of £9,568, which allows you to avoid paying Income tax and NIC. Whilst this amount is low, you’ll still be eligible for the State Pension and any benefit entitlements, as your earnings are above £6,240 pa (the Lower Earnings limit).

Another option is to pay yourself a salary up to the tax-free Personal Allowance of £12,570. You won’t have to pay Income Tax on this amount, but you would be liable to pay 12% NIC on your earnings between the £9,568 and £12,570. You could then take the remainder of your income as a dividend, of which the first £2,000 would be tax free.

Dividends

As a shareholder of your Limited Company, you’re able to take profit in the form of a dividend. Do note that you’re only able to do so if there is profit in the company, otherwise it’ll be classed as an illegal dividend. The amount of dividend you’re able to pay yourself will be in relation to the amount of shares you hold within the company, so for example if you’re the sole shareholder then you’re able to take all remaining profit once the company’s depreciation costs have been accounted for (ie tax, expenses, etc).

Limited Companies pay 19% Corporation Tax on all taxable income. The first £2,000 you take as annual dividend income is tax free, plus you won’t have to pay NIC or Income Tax. Once you go over the £2,000 limit you’ll pay dividend tax based on your Income Tax band (so therefore you’ll pay the Basic rate, Higher rate or Additional rate tax).

In order to pay dividends to your company’s shareholder/s you’ll need to ‘declare’ them to the board (even if you’re the only shareholder), and take minutes of the meetings as a record. Having a record of any dividends issued and on which dates will provide a solid paper trial, should HMRC investigate you in the future. Along with this record you’ll need to keep a dividend voucher, which’ll display details of the payment. Your accountant will be able to help you with this.

Director’s Loan

You’re able to also take money out of your company in the form of a Director’s Loan. This method allows you to:

• Lend money back to your company
• Borrow more money from the company than you originally put in
• Reclaim any money you originally put into the company

You must keep a record of any such loans in a Director’s Loan Account, and these must be shown as part of your company’s balance sheet.

Be aware that if you take more money than has been paid into the business, your Director’s Loan Account will be overdrawn. There will be tax implications should this happen. If your company owes you money, then your loan account will be in credit and you’re able to reclaim money without facing any tax liabilities.

For example, if you owe your company less than £10,000:

• There are no personal tax liabilities, but there could be tax consequences for your company
• If your loan is overdrawn for more than 9 months and a day from the company’s accounting reference date (ARD), your company will be liable to pay Section 455 Tax on the full overdrawn amount
• Your company’s tax return must show any outstanding loan amount
• Section 455 tax carries a 32.5% tax charge – and your company will have to pay it alongside its Corporation Tax liability

If you owe your company more than £10,000:

• You must declare the loan amount on your Self Assessment tax return
• You might be liable to pay Income Tax on any interest generated by the loan
• Your company must deduct Class 1 National Insurance on the loan
• Your company’s tax return must show the loan’s outstanding amount
• Your company will have to pay Section 455 Tax (32.5%) on the overdrawn amount

If your loan is not repaid / written off:

• Class 1 NI must be deducted by your company through payroll
• Through self-assessment you must pay Class 2 and Class 4 Income Tax on the loan

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

• The amount of money a director gives to the company (not including payments for any shares they may take)
• The amount of money a director may borrow from the company

These records are traditionally kept in the Director’s Loan Account. Depending on the amount of money taken, it may be subject to certain tax liabilities, so we advise checking this with your accountant.

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

If you end up taking out less money from your company than what you’ve put in, you as the director are not borrowing any money, you’re reclaiming funds which you’ve already put into your company.

Therefore the Director’ Loan Account will either show a balance of nil or remain in credit, depending on how much money you take out. If your account is in credit you can take out the available money at any time, without any tax implications.

If your Director’s Loan Account is overdrawn

If more money is taken out than put in, (other than as a salary, expense or dividend), the withdrawal is a benefit and is classed as a director’s loan. This will therefore make your Director’s Loan Account overdrawn.

Your company’s financial year

If your Director’s Loan Account remains overdrawn past 9 months and a day after the end of the accounting period, you will be charged S455 Tax at a rate of 32.5% by HMRC. You will be paid this tax back once you’ve paid the overdrawn amount back to your company.

Expenses

You’re able to reclaim business expenses so long as they’re only for business purposes, and to be able to do so you must complete the correct claims forms and keep a record of the receipts. You’re able to claim tax-deductible expenses in the following form:

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

Your company is able to reimburse you these amounts when you are paid your monthly salary, or at any other point which is convenient to you, and the company must keep a record of all expenses made for a minimum of six years along with the receipts.

Each tax year end you’ll need to complete a P11D whereby you’ll declare the benefits for that tax year.

How Vantage can help

Tax can be confusing, especially when it comes to working out your % margins, what tax is due when, and how much you could up paying extra if you get it wrong. That’s where we come in, our expert accountants here at Vantage help small business owners just like yourself everyday with their tax and accounts. Don’t be left out of pocket by getting it wrong, speak to our team today to find out how we can help you become a success whilst also keeping the taxman happy.