If you’re a company director or ‘participator’ and take money out of your company that’s not a salary or a dividend – over and above any money you’ve put in – you’re classed as having received the benefit of a director’s loan.

If your director’s loan account is overdrawn, your company must pay tax on any amount you’ve not repaid by nine months after the end of your Corporation Tax accounting period.

This guide explains what a director’s loan is and the Corporation Tax implications for your company. It tells you if or when you need to inform HM Revenue & Customs (HMRC) that a director’s loan exists and explains what entries you need to include in your Company Tax Return to account for any tax that’s due.

It also mentions possible Income Tax implications of directors’ loans for you and your company.

Your company lends money to you: director’s loan account in debit or overdrawn

If you take money out of your company’s bank account over and above money you’ve loaned to the company – and that money is not a salary or a dividend – then it’s a loan from the company to you. Your director’s loan account is overdrawn.

HMRC considers any such loan or advance drawn out of the business as a director’s loan whether or not you have set up any type of account in the company’s books.

A director’s loan account can include:

  • cash payments other than your salary or dividend
  • expenses that you may have paid for using company funds that are actually for personal use
  • money withdrawn for your personal use – for example, to renovate your home, pay school fees or personal Income Tax

Corporation Tax implications of overdrawn directors’ loan accounts

Whether your company has to tell HMRC that your director’s loan exists – and pay tax on the outstanding loan amount – depends on when the loan is repaid.

Strictly speaking this tax is not Corporation Tax. But in practice, you calculate the tax on your overdrawn loan on your Company Tax Return and add it to the Corporation Tax that’s due. The section below shows you how to do this.

Your director’s loan account is paid off by the end of your company’s accounting period

If you pay off your director’s loan in full by the last day of your company’s Corporation Tax accounting period:

  • your company does not pay Corporation Tax on the loan
  • you don’t need to tell HMRC about the loan on your Company Tax Return

For example, your company’s accounting period runs from 1 April 2008 to 31 March 2009, and you pay off your director’s loan account on 30 March 2009. You don’t need to include any information about this loan on your Company Tax Return.

Your director’s loan account is paid off within nine months and one day of the end of your company’s accounting period

If your director’s loan account is overdrawn after the last day of your company’s Corporation Tax accounting period but you repay it in full within nine months:

  • your company does not pay tax on the loan
  • you must include details of that loan in your Company Tax Return

For example, your accounting period runs from 1 April 2008 to 31 March 2009. You pay off your director’s loan account on 30 September 2009. You need to include information about this loan on your Company Tax Return but you will not need to pay any tax on the loan.

Your director’s loan account is not paid off within nine months and one day of the company’s year-end

If your director’s loan account is not paid off in full within nine months after the end of your company’s accounting period:

  • You must include details of the loan in your Company Tax Return.
  • Your company must pay Corporation Tax on the loan – the current tax rate for directors’ loans is 25 per cent of the loan.
  • HMRC will charge interest on the amount unpaid – interest runs from the normal payment date for the accounting period in which the loan was made, to the earlier of the date the tax is paid or the date the loan is repaid. This interest is not repayable.

For example, your company’s accounting period runs from 1 April 2008 to 31 March 2009. Your director’s loan account is overdrawn by £10,000 on 1 January 2010. You need to include information about this loan on your Company Tax Return. You should add £2,500 (£10,000 × 25%) to how much Corporation Tax you must pay.

As you are including the tax due on your directors’ loans as part of your company’s ‘self assessment’ of the tax it has to pay, you can’t appeal against the amount that’s due or ask HMRC to postpone collection of it.

Other tax implications of directors’ loans

Overdrawn directors’ loan accounts

If your director’s loan account is overdrawn there may also be Income Tax and National Insurance implications for you and for your company.

Directors’ loan accounts in credit

If your company pays you interest on your director’s loan, there are Income Tax implications for you and your company.

You must show the interest you’ve received as income on your Income Tax Self Assessment tax return.

Your company must pay this interest to you only after withholding Income Tax at the basic rate – currently 20 per cent.