A limited company is a separate legal entity from its owners. That is; a company is a person in its own right in the eyes of the law.
There are two main ways for directors to extract profits from a company:-
1. If they are employees of the company, directors may take a salary;
2. If the directors are also shareholders, they may receive dividends.
Providing the company has adequate profits to cover its dividend payments.
If directors take more than their owed salary and dividends, this will be classed as a loan from the company to the director.
When a company is owed money by its director, the balance is also referred to as the “overdrawn director’s loan account.” The loan account can be made up of various transactions throughout the year. These include personal items the company has paid for on behalf of the director.
The Director’s loan attracts two tax aspects:-
1. S455 corporation tax: Usually, any loan balance that exists at the end of the accounts year attracts a temporary corporation tax of 25%. The corporation tax is refunded once the director repays the loan. However, there would NOT be any tax to pay if the loan is repaid within nine months of the company’s year-end. S455 tax is named after the Companies Act section that outlines the tax requirements for overdrawn directors’ loan accounts.
2. P11Ds: Since the directors are receiving an interest free loan, not paying any interest is deemed a benefit. If at any point during the year the loan exceeds £10,000 (£5,000 before 6th April 2014), the company is required to pay National Insurance (Moreover, the director is required to pay tax via his/her tax code) on this benefit. The benefit is calculated as the interest that should have been charged.
Southside Accountants in Wimbledon can advise you on how to extract money from your company without causing loan account problems. With good bookkeeping and only taking what the company can afford to pay, directors should not be troubled with loan account issues.