Directors Loans Tax Implications

Many businesses may require investment from their directors at some point, whether for start-up costs, machinery purchases, or working capital during lean times. Directors can charge interest on any money borrowed from personal funds that have not been repaid. This article explains the tax implications of charging interest on a director’s loan and the requirements for filing CT61 returns.

Form CT61 is used by companies in the UK to report and pay tax on certain types of income, such as interest, royalties, and other qualifying payments. The primary purposes of the CT61 form include the following:

1. Claiming income tax return on interest, the company pays to its directors or other individuals.
2. Claiming return on alternate finance payments.
3. Reporting and claiming tax on relevant distributions, such as manufactured payments from abroad.

For example, when a company pays interest on a director’s loan, it must disclose and file CT61 Returns. The company is required to deduct 20% tax on the interest before paying it to the director. The interest payment and deducted tax are then reported and paid to HM Revenue and Customs using the CT61 form.

The tax implications of charging interest on director’s loans can be summarized as follows:

1. Corporation Tax Deduction: Interest paid by the company on a director’s loan is tax-deductible for Corporation Tax purposes. This means that the interest expense can be deducted from the company’s taxable profits, potentially reducing its Corporation Tax liability.
2. Income Tax for Directors: The interest earned by the director on a loan is considered personal income and is subject to income tax. The director must declare the interest income on their tax return (Self-Assessment). Depending on the director’s overall income and tax bracket, they may be liable for additional tax on the interest earned.
3. Withholding Tax and CT61 Returns: If the company pays interest on the director’s loan, it must register with HMRC and file CT61 Returns, which require the company to deduct 20% tax (basic rate) on the interest before paying it to the director. The withheld tax is reported and paid to HM Revenue and Customs using the CT61 form every quarter.
4. Personal Savings Allowance: The interest received by the director may be tax-free if the Personal Savings Allowance covers it. For the 2021/2022 tax year, the allowance is £1,000 for basic rate taxpayers and £500 for higher rate taxpayers. There is no allowance for additional rate taxpayers.

It is crucial for both the company and the director to understand and comply with these tax implications to avoid potential penalties and interest charges from HMRC. Proper record-keeping and timely reporting of interest payments using the CT61 form are essential to ensure compliance with tax regulations.

Record keeping for director’s loan accounts (DLAs) is essential to ensure accurate financial reporting and compliance with tax regulations. A director’s loan account tracks money borrowed from or paid into the company by a director. Proper record keeping for DLAs involves:

1. Recording all transactions: Keep track of all transactions related to the director’s loan account, such as cash loans, deferred salary payments, or payments made on behalf of the company for products or services. Record the date, amount, and nature of each transaction.
2. Monitoring the account balance: Regularly monitor the director’s loan account balance to determine whether it is overdrawn (the director owes the company) or in credit (the company owes the director). This information is important for tax purposes and financial reporting.
3. Maintaining clear documentation: Ensure all documentation related to the director’s loan account is clear, accurate, and well-organized. This includes loan agreements, board meeting minutes authorizing the loan, and related correspondence.
4. Reconciling the account: Regularly reconcile the director’s loan account with the company’s financial records to ensure accuracy and identify discrepancies.
5. Reporting on the balance sheet: When the company files its annual statutory accounts, the director’s loan account should be reported on the balance sheet as a current liability (if the director owes the company) or a current asset (if the company owes the director).
6. Retaining records: Keep all records related to the director’s loan account for a minimum of six years from the end of the financial year in which the transactions took place. This is necessary for potential tax inspections and HM Revenue & Customs (HMRC) audits.

By maintaining accurate and up-to-date records for directors’ loan accounts, companies can ensure compliance with tax regulations, avoid potential penalties, and facilitate accurate financial reporting. 

Understanding directors and company loans can be complex, especially with tax and business considerations. If you need help determining whether you’re correctly accounting for tax on interest payments, please contact Tax Accountant at 0800 135 7323 or email info@taxaccountant.co.uk for expert advice.