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If I have a directors loan of £100k taken out in the UK and I am now look to pay this back. Would I be looking to pay the full £100k or is it calculated differently?

I am slightly confused here, when you take the directors loan you are effectively avoiding paying tax on that as the alternative to having those funds are to take dividends.

So when paying back a directors loan, would it not be just paying back the tax that you would pay for dividends?

:) Thanks

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  • This link might help: crunch.co.uk/knowledge/tax/directors-loan-account – RonJohn Feb 15 at 14:32
  • Thank you Ron. I had oddly looked at this already :D So in my example... I have taken out 100k as a directors loan and now I need to pay this back. So it really is just as simple as, I owe £100k. Or if I put 100k back into the company to balance the books, I could then take out then 100k as dividends and pay the normal dividends tax on it? – Jamie Hutber Feb 15 at 14:41
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    I don't live in the UK; the notion of a "Director's loan" is completely foreign to me. – RonJohn Feb 15 at 14:48
  • The HRMC website has a page which I believe answers your question, and specifically covers Corporation Tax and interest, as well as benefit in kind and National Insurance: gov.uk/directors-loans/you-owe-your-company-money – StuBez Feb 15 at 14:52
  • I think its still hard to get exact information from the gov site, for "real world" examples. But thank you all the same Stu, I appreciate it. – Jamie Hutber Feb 15 at 15:43
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The purpose of a director's loan account is to allow you a straightforward way to either subsidise a cash-poor company with personal capital (thus becoming a creditor to the company), or to take money out of the company (e.g. to cover personal living expenses whilst you operate the company, and thus become a debtor to the company).

The purpose of the latter is because you (or other directors) may not want to finalise the withdrawal you make (via salary or dividend) until later - for example, the dividend will be determined later by the actual profitability of the company.

Until the profitability is clarified, you remain on the hook personally to repay the director's loan you've received. If the dividend (i.e. your share of the profits) later exceeds the loan, then you'll simply be paid the net amount (i.e. the gross dividend minus the total loan you've already received).

If the dividend turns out to be less than the loan, you'll have to settle the debt with the company by putting money back in - perhaps by liquidating your assets, or taking out a personal loan at interest. Also if the company folds and owes creditors (whether other directors, or suppliers, etc.), you'll be personally liable to make good the director's loan you received.

But in the meantime, you can fund your standard of living based on your rough expectation of profitability, and leave the detailed accounting and taxpaying until later once the whole year's trading is concluded.

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  • It's important to realize this answer ignores the MOST IMPORTANT THING - which fortunately is explained in gnasher's answer. – Fattie Feb 15 at 22:10
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    Thanks Steve for answering this! I think the logic makes complete sense. Unfortunately I've yet to find any clear information on if i could settle the bank accounts by swapping the directors loan for a taking dividends. Or if I would need to find £100k to put into the company. From what I can see and logically this would be the normal course of action if you have no way to get anything personal loans funds – Jamie Hutber Feb 16 at 22:54
  • @JamieHutber, you can simply net it off. You don't have to physically repay the £100k into the firm's bank account before taking the dividend back out, though as others say, it's imperative to have scrupulous accounting for the transaction in your books. If you're dealing with figures in the hundreds of thousands of pounds a year, then a couple of hundred pounds for a professional accountant to prepare your accounts and provide advice on everything from record-keeping to tax law wouldn't go amiss. I've never known anyone in business to say they regret talking to a professional accountant. – Steve Feb 16 at 23:08
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    @JamieHutber, I've just read some of your other comments on other answers, and I'd definitely say talk to an accountant about this. And I'd take Fattie with a pinch of salt - based on his word choices I'm not sure he's based in the UK jurisdiction, and seems to have a somewhat cranky habit of using capitals and bold for emphasis whilst also not speaking entirely clearly on this subject. (1/2) – Steve Feb 16 at 23:19
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    In particular, I'm not sure you're properly understanding the distinction between accounts held at the bank, and the accounts in your books. I suspect what you've done is simply transferred and spent the company's money as your own without formality, and are now calling it a "director's loan" retrospectively, in which case get an accountant to sort out the record-keeping formalities and clarify your financial position (including taxes due and the tax treatment of the loan). They won't report you to HMRC or anything like that - they'll sort any mess out for you and get things in order. (2/2) – Steve Feb 16 at 23:30
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If you plan not to pay the money back then it's not tax avoidance but criminal tax evasion. Also, if you go bankrupt, then anyone who is owed money by your company can go after you, because you owe the company £100k which needs to be repaid.

If you pay the money back, then it's perfectly legal, and you can pay yourself the same money as a dividend, after paying the right taxes.

PS. You said "If the company makes £100K profit, I can just take the money out as a dividend and put it back in the company". That would not be clever if you are the sole owner. Say the company made £100K profit, pays £20K corporation tax and has £80K in its bank account. If you take that money out as a dividend, you pay probably another 25% taxes, so you have £60k in your private pocket. That's fine if you want to spend it. But if you re-invest it, you still own only 100% of the company, and the company has now only £60k in its bank account. If you don't want to spend the money then better to leave it in the company, and you can pay yourself dividends when you are retired, or if you want to go on holiday for a year, because then you'll have no other income and therefore a lower tax rate.

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  • Ah yes, so this is the key bit of information that I could not find "If you pay the money back, then it's perfectly legal, and you can pay yourself the same money as a dividend, after paying the right taxes." So all said and done, if the company earns profit £100k. I would just take that money out from the company as dividends and then put the money back into the company? Thank you very much for the answer!! – Jamie Hutber Feb 15 at 16:52
  • Also worth noting, this question isn't about how to avoid paying this money. Its about understanding how the taxes work and the cost I will incur when i have to pay this back. Its hard to plan right now :D – Jamie Hutber Feb 15 at 17:06
  • So i guess the key point, can you pay back the money with money you have earnt from the company? – Jamie Hutber Feb 15 at 19:28
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    The first sentence of this answer is not needed, and, based on the link provided by @StuBez may be incorrect. The HMRC website seems to indicate that if the loan is written off, you (the director) must treat it as income and pay tax accordingly. – Eric Feb 15 at 19:49
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    "So i guess the key point, can you pay back the money with money you have earnt from the company?" sort of - but OF COURSE the money you earn from the company is VERY MUCH TAXED. almost always you would "FIRST" just pay it back clenaly in to the company's bank account (say by getting a quick bridging loan from your house or whatever), then the company's bank account would be all square, as if the loan didn't happen. THEN pay yourselves via normal procedures. – Fattie Feb 15 at 22:14
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Or if I put 100k back into the company to balance the books, I could then take out then 100k as dividends and pay the normal dividends tax on it?

Yes, THAT is correct. You got it.

If you decided to "pay yourself first", that is inviting the end of the universe. Sure, say you got paid (random example) 400k - of course both the company and you paying various taxes etc on the 400k. Maybe you (personally) are left with 193k. You wait a couple days and pay back the 100k from your bank account to the company bank accounts. If you do that, essential to have immaculate accounting, paperwork and orderlyness. Good luck!

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  • haha thanks Fattie... I however can detect a slight hint of sarcasm! Can I just confirm... What is the best course of action. I have no money in my personal accounts and no way whatsoever to get these funds. I can see no other option other than Hutber Limited earning money and me taking dividends from that to offset the debt. – Jamie Hutber Feb 16 at 22:49
  • ok - sorry if I was not clear. go ahead a PAY YOURSELF from HutberLtd. Do that exactly as you normally would, !!!! PAYING ALL TAXES !!! So HutberLtd would pay all relevant taxes (payroll, social security, God knows what) and you personally would pay any relevant taxes. AFTER DOING THAT and all the money clears. Wait say two days. And then, repay some of the loan from "yourself" to "HutberLtd". – Fattie Feb 16 at 22:52
  • allow me to restate (1) IDEALLY completely pay back the company. then proceed. (2) HOWEVER, IF YOU DO HAVE TO get paid from the company first. then enact the payment from the company BUT PAYING EVERY AND ALL COMPANY AND PERSONAL TAXES - only then, pay back some of the loan to the company. :O – Fattie Feb 16 at 22:53

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