A question on Directors Loans

[billyboy120]

Hi all,

When I started my company I put some money into it as a directors loan to get the ball rolling, with the understanding that I could take this money out tax free when the company could afford to repay it.

Am I right in saying that any repayments of this loan should show as a cost on the companies P&L?

Cheers!
Billy

 

[Zeno]

No, entirely wrong I am afraid. It is a capital item shown only on the balance sheet.

 

[billyboy120]

Thanks, I thought it might have been. So that means that I will pay corporation tax on that money?

Would directors dividend show as a cost? Should I take the money as a directors dividend and write this off against my directors loan??

Thanks for your help!

 

[MyAccountantOnline]

So that means that I will pay corporation tax on that money?

No as Zeno says its just a capital repayment - it doesnt have any effect on CT at all.

Would directors dividend show as a cost? Should I take the money as a directors dividend and write this off against my directors loan??

Dividends are a way of paying out profits to a shareholder.

You may wish to look at a combination of salary, dividends and directors loan repayments depending on your personal circumstances, the funds required, the profitability of the company etc.

 

[billyboy120]

No as Zeno says its just a capital repayment - it doesnt have any effect on CT at all.

I see. Obviously I'll be repaying that loan with profits that the company makes, but if it's not shown on the P&L, my profits for the company will be higher than they actually are??

 

[MyAccountantOnline]

I see. Obviously I'll be repaying that loan with profits that the company makes, but if it's not shown on the P&L, my profits for the company will be higher than they actually are??

Profits are company sales less company expenses - repayment of directors loans isnt a company expense.

The directors loan is (or should be) in the balance sheet so when you reduce the loan ie repay yourself, the balance in the balance sheet will just reduce, this doesnt effect profits at all.

You are confusing profits with cashflow - repaying the directors loan wont reduce profits but it will reduce cash availiable.

Imagine a different scenario if you borrowed £50,000 from the bank in year 1 and were able to repay the balance in year 2 it wouldnt be a company expense (excl the interest) when its repaid and wouldnt be taxable income when it came in, in year 1 - the directors loan is the same.

 

[billyboy120]

Thanks Nicola, so just to clarify, if I put £20,000 in as a directors loan at startup. And profits at the end of year 1 are £50,000. I take £20,000 of that as laon repayment, leaving £30,000 in the company. I'd pay Corporation tax on the £50,000 profit?

 

[Mattonella Tile Studio]

If you put 20k in, and made 50k profit, you'd have 70k in your account. You take 20k as loan repayment, leaving 50k in the company, and pay CT on 50k.

 

[MyAccountantOnline]

Thanks Nicola, so just to clarify, if I put £20,000 in as a directors loan at startup. And profits at the end of year 1 are £50,000. I take £20,000 of that as laon repayment, leaving £30,000 in the company. I'd pay Corporation tax on the £50,000 profit?

Yes indeed

The company doesnt pay tax on the money when it comes in and similarly doesnt get any relief when it goes out.

 

[billyboy120]

ahh right I see! So really I can't get it back out tax free as I'll either pay corporation on the profits used to repay it, or if I convert it to equity and take a dividend, I'll pay tax on the dividend!

 

[elaine@cheapaccounting]

I see. Obviously I'll be repaying that loan with profits that the company makes, but if it's not shown on the P&L, my profits for the company will be higher than they actually are??

well assuming this is all straight forward cash accounting and you have the £50k in the bank.

 

[billyboy120]

Can i take money out as a directors dividend (which will reduce the company profit) and then write this off against my directors loan??

 

[elaine@cheapaccounting]

Can i take money out as a directors dividend (which will reduce the company profit) and then write this off against my directors loan??

dividends come out of after tax profits

 

[billyboy120]

ahh right so i'll pay corporation tax on the profits and then tax when i take the dividend?

 

[elaine@cheapaccounting]

ahh right so i'll pay corporation tax on the profits and then tax when i take the dividend?

you pay CT on profit.

Dividends have a nominal tax credit associated with them

You only pay additional income tax on dividends if you are over the higher rate threshold.

Please get your accountant to explain all of this to you in detail.

Dividend tax credits often baffle people, see this link:

http://www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/TaxOnSavingsAndInvestments/DG_4016453