Borrowing money from your limited company is possible, but it’s essential to understand the financial and tax implications before doing so. Since your company is a separate legal entity, any funds you withdraw could lead to tax consequences, especially if you don’t have a positive balance in the company. In this FAQ, we’ll explain how borrowing works, potential tax liabilities, and how to manage overdrawn loan accounts effectively to avoid unnecessary charges.
Can I Borrow Money from My Limited Company?
Yes, you can borrow money from your limited company, but it’s important to understand that your company is a separate legal entity from you as a shareholder. Withdrawing funds from your company can have potential tax implications that need to be considered carefully. Here’s a breakdown of what you need to know.
Borrowing from Your Limited Company: Key Considerations
If you, as a shareholder, have a positive balance in your account—whether from funds you’ve introduced to the company or from dividends, salary, or bonuses due—any cash withdrawals up to that amount won’t result in tax consequences. However, if you withdraw more than this balance, you effectively become in debt to the company, which can lead to tax implications.
Throughout an accounting period, the balance in a shareholder’s loan account may fluctuate, switching between amounts owed to and from the company. It’s crucial to keep track of these movements to avoid unexpected charges.
Consequences of an Overdrawn Shareholder Loan Account
1. S455 Charge
If there is a balance outstanding at the end of the accounting period (the company’s year end) then the company is potentially subject to a charge to tax at a rate equivalent to the tax charge on dividends currently 33.75%.
However if the loan is repaid by the shareholder (for example by voting a dividend or actual introduction of cash) within 9 months of the year end then the tax is not payable.
If the loan is not repaid until after 9 months from the year end the tax is still payable. It can be reclaimed once the loan account is repaid, but not until 9 months after the end of the accounting period in which the repayment is made. Furthermore HMRC are currently very much in arrears with making these repayments and it can take several months for a claim for repayment to be dealt with.
2. Income Tax on a Beneficial Loan (Benefit in Kind)
The other potential implication of an overdrawn shareholder’s loan account where the shareholder is also a director is that because it is effectively an interest free loan it falls foul of the beneficial loan rules and is taxable on the director as a benefit in kind which is calculated as the interest which would be payable on the loan if it were obtained on the open market.
However such a benefit only arises where the balance exceeds £10,000, unless the company actually charges the director interest on the loan at a commercial rate.
How Ascentis Can Help
At Ascentis, we always recommend that businesses maintain up-to-date management information. This enables you to monitor your finances in real-time, ensuring that you declare appropriate dividends and set withdrawal levels for shareholders. By staying on top of your accounts, you can avoid the risks associated with overdrawn loan accounts and make informed decisions about borrowing from your limited company.
For more detailed advice on managing shareholder loans or other accounting needs, feel free to contact us.