After you’ve finished your business plan, set up your new limited company and opened your commercial bank account, you are finally ready to start doing some business. Once you have signed up your first clients, the funds in your company bank account will start to build up and you will inevitably want to withdraw some of these funds in order pay for personal expenses and cost of living.
One way of taking money out of your company is by setting up a payroll and paying yourself a salary, though this requires a small amount of admin and often further expense. If you are trying to keep costs and admin down at the beginning, a common way of withdrawing funds is via a director’s loan.
If you take money out of your company which is not a salary, dividend or expense repayment (or money you’ve previously loaned or paid into the company), this is called a director’s loan (i.e. the company has loaned money to the director). It is important to keep a record of all these payments as they constitute the director’s loan account.
Whilst you can keep a record of director’s loan transactions in an Excel spreadsheet as in the example above, you can just as easily record the transactions in your bookkeeping system, such as Quickbooks or Xero. At the end of the financial year, you can pay the money back to the company or, if the company has a higher net profit than the amount you owe, you can convert this into a dividend.
Bear in mind that you can borrow up to £10,000 from the company interest free. If your director’s loan exceeds this threshold, it becomes taxable as it is classed as a benefit-in-kind. This must also be reported using a P11D form. More details about deadlines and tax rates on these amounts can be found here.
It is also important to look at the money you withdraw in a holistic fashion, in order not to pay too much tax. You can read our article on tax efficient profit extraction strategies here.
If you have any questions about your director’s loan account or would like some advice on the best ways to take money out of the company tax efficiently, please don’t hesitate to get in touch.
