There may be times where you need to borrow money from your small business, so how do you go about doing it, what are the associated tax risks, and what do you need to be aware of?
In this blog we explore all that, to help you confidently borrow money from your Limited Company.
How does it work?
It doesn’t matter how much or for how long you wish to borrow from your small business, but what does matter is how much you have in your business bank account, and that you have enough to account for tax, any staffing costs, and other business depreciation elements.
Taking money out of your small business legally
There are various ways you’re able to take money out of a Limited Company, including:
- 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
A director’s salary
Most directors of Limited Companies will pay themselves a salary through PAYE. Depending on the amount you pay yourself, you may also need to pay National Insurance Contributions (NICs), and/or income tax. All salary payments are a tax deductible expense, so your company will not be liable to pay any Corporation Tax liability on this money. Your company will however, be subject to paying the 15.05% Employer’s NICs on any salary earnings that fall above the NIC Secondary Threshold of £9,100 (for the 2022/23 tax year).
Paying yourself a salary up to the NIC Secondary Threshold of £9,100 means no income tax or NI is payable. This value does still allow you to qualify for the State Pension and any other benefit entitlements, as your income exceeds the Lower Earnings limit of £6,396 per annum.
Another popular salary level taken by directors is the tax-free Personal Allowance of £12,570, whereby you won’t be liable to pay Income Tax, but you must pay employee NIC contributions on any earnings between £11,908 and £12,570.
Any shareholder of the Limited Company is able to take profit out of the company in the form of dividends. You can only do so though when there’s profit in the company, otherwise the dividend is classed as ‘illegal’.
The total amount you’re able to pay yourself is dependent on the number of shares you personally hold, so for example if you hold 100% of the shares then you’re able to take the remainder of the profit from your company once all other costs have been accounted for (i.e. tax, expenses, etc).
All Limited Companies have to pay 19% Corporation Tax on taxable income (which is going to increase to 25% for all profits exceeding £250,000 from 1 April 2023). The first £2,000 of annual dividend income is taxed at 0%, and is free from NICs and Income Tax. Any amount that exceeds the £2,000 limit will be subject to dividend tax that’s based on your Income Tax band (ie basic, higher or additional rate tax).
Before you pay out a dividend you must declare the dividend to the board, and make a written record of the meeting’s minutes. This provides a black and white paper trail of what was said and when, the amounts issued and to whom. You must also keep a record of a dividend voucher, which will display the dividend’s details.
By taking money from your company in the form of a Director’s Loan, you’re able to:
- Lend money back to your company
- Borrow more money from your company than the original amount you paid in
- Reclaim any money you originally paid into the company
You must keep and maintain records of Director’s Loans in a Director’s Loan Account, which must be shown as part of your company’s balance sheet.
If you decide to take out more money than you’ve paid into the business, your Director’s Loan Account will become overdrawn, and there are tax implications from being so. If your company owes money then your loan account will be in credit and you’ll be also to take money out without facing any tax liabilities.
For example – if you owe your company less than £10,000:
- There are no personal tax liabilities, but there may be tax consequences for your company if your loan is overdrawn for more than 9 months following your company’s yearend (your company’s filing deadline). If this is the case then the company must pay Section 455 Tax on the full amount overdrawn
- Section 455 Tax carries a 33.75% tax charge (32.5% for loans prior to 06/04/2022), which your company is liable to pay alongside its Corporation Tax liability
- You must display any outstanding loan amounts on your company’s tax return
If the amount you owe your company exceeds £10,000 at any point:
- If the loan from your company is overdrawn for more than 9 months from your company yearend, there may be tax consequences. If this is the case the company must pay Section 455 Tax on the full amount overdrawn
- Section 455 Tax carries a 33.75% tax charge (32.5% for loans prior to 06/04/2022) which your company is liable to pay alongside its Corporation Tax liability
- Any outstanding loan amounts must be displayed on your company’s tax return
- When a director’s loan exceeds £10,000, if you repay the loan to the company with interest applied (at HMRC’s official rate of interest) the loan will not be classed as a taxable benefit
- If the loan is repaid minus the interest you’ll need to declare the loan via your company P11D and your Self Assessment Tax Return. This is because the loan is deemed as a benefit in kind (BiK) for the Director to receive an interest-free loan from the company
- The value of the benefit is calculated at the official rate of interest. Class 1A National Insurance at 15.05% will then be payable from your company via form P11D, and the benefit will also be included within your personal tax return, taxed at your appropriate rate of tax
What you need to keep a record of when it comes to Director’s Loans:
- The value of money a Director gives to the company, excluding any share payments they may take
- The total value a Director may borrow from the company
- Any interest that may be payable on that loan
These records are usually kept within the Director’s Loan Account. It may be subject to certain types of tax, depending on how much is borrowed. It’s therefore advisable to discuss your plans with your Vantage Accountant before borrowing any money from your Limited Company.
What if your Director’s Loan Account has zero balance, or is in credit?
If you take out less than the total balance you’ve paid in, you’re not borrowing any money, and therefore claiming funds which you’ve already paid in.
The Director’s Loan Account will either show a balance of nil or remain in credit, depending on the total amount you draw out. You’re able to take out the available balance at any given time without any tax implications, so long as your company account is in credit.
What happens when your Director’s Loan Account is overdrawn?
If you draw out more than what’s already in there (discounting a salary payment, dividend or expense) the withdrawal is a benefit, and will therefore be classed as a Director’s Loan. This will in effect make your Director’s Loan Account overdrawn.
Your Limited Company’s financial year
If your account remains overdrawn for 9 months after the end of the accounting period, HMRC will charge you S455 Tax at a rate of 33.75% (32.5% for loans prior to 06/04/2022). You are able to claim back the tax paid once you’ve paid the full amount of overdrawn money back into your Limited Company.
You are able to reclaim the cost of expenses, so long as they were purchased wholly and exclusively for the purpose of the business. You must keep all receipts and a record of each expense, what they were needed for and when. You are able to claim tax-deductible expenses in the following forms:
- Parking and mileage costs
- Travel and accommodation
- Mobile phone contract costs
- Food and drink
- Computer and office equipment
- Training costs
- Postage costs
If the expense is incurred personally on behalf of your business you’ll be reimbursed by your company when you’re paid weekly or monthly, or whenever is convenient to you. Your company must keep a record of all expenses for a period of 6 years, along with what the expense was and what it was needed for.
How your Vantage Accountant can help
Tax is confusing, especially when it comes down to working out your % margins, what taxes are due and when, and how much extra you could end up paying if you get your numbers wrong. That’s where your expert Vantage Accountant comes in handy, to help you navigate the complex world of running your Limited Company. If you’re considering borrowing money from your company give your Vantage Accountant a call today.