Director's Loan Agreements and Accounts
Director’s loans are a fundamental aspect of business finance. They’re essential for maintaining transparent financial records and ensuring compliance with legal and tax regulations.
At Lawhive, our network of expert corporate lawyers is on hand to provide tailored guidance and assistance on director’s loans and director’s loan agreements to make sure you understand your rights and obligations.
Contact our legal assessment team today to find out more and get a fixed-fee quote.
What is a director’s loan and how do they work?
A director’s loan is any money you or close family members, receive from your company that doesn’t fall under salary, dividends, or expense reimbursements. However, it doesn’t include funds you’ve previously invested in or loaned to the company.
Director’s loans can also work the other way for example, if a director lends money to the company.
What is a director’s loan agreement?
A director’s loan agreement is an agreement between a company and its director that lets the company lend money to the director for various business purposes, like providing an alternative to paying a salary or funding other essential business needs.
You must have a director’s loan agreement before money moves between the company and a director. The agreement should outline the terms and conditions of the loan, as with any personal loan agreement, including repayment terms and interest rates if they apply.
What is a director’s loan account?
A director’s loan account is a record of any money a director borrows from or pays into the company. It must show all cash withdrawals made from the company and all personal expenses paid with the company’s money.
At the end of the company’s financial year, one of two things can happen:
A director owes money to the company
The company owes the director money.
Do you have to pay interest on a director’s loan?
Interest on a director’s loan is not automatic. It depends on the agreement between the director and the company. Some director’s loans are interest-free, while others may have an interest rate attached.
If there is interest, it should be agreed and documented in the director’s loan agreement. The current HMRC director’s loan rate in use is 2.25%.
If the loan is interest-free or has a low-interest rate, HMRC may treat the forgone interest as income and tax it accordingly.
Should a director’s loan be secured against a property or asset?
While not a requirement, it’s wise to secure a director’s loan against a property or asset. This can be done with the help of a solicitor by registering a second charge on a property owned by the company at the Land Registry. You will, however, need to get the primary lender’s consent to do this if there’s already a mortgage or loan on the property.
Do you have to pay tax on a director’s loan?
Both directors and their company may have to pay tax on a director’s loans. More specifically, directors may need to pay income tax, while companies may be liable to pay:
Corporation tax
National Insurance contributions
Do director’s loans have to be paid back?
Director’s loans have to be paid back, even if the company runs into financial trouble. Unless there’s a different agreement in place, the company can ask for repayment of a director’s loan at any time.
If you’re a shareholder, you may be able to use dividends to repay a director’s loan, but if there’s not enough money to cover it, you still have to repay the loan.
If a director’s loan isn’t repaid when requested, formal steps may be necessary to recover it. An overdrawn Director’s Loan Account is seen as a company asset and during insolvency, the officeholder will pursue repayment to benefit the company’s creditors.
How much can I borrow as a director’s loan?
A director’s loan can be given for any amount. However, if a director is not also a shareholder, they need permission from the shareholders before borrowing over £10,000. If they don’t get permission and still take the director’s loan, it could be seen as doing wrong or even stealing.