Director or employee beneficial loan

By Elena Turcanu

Taking out a director's loan could result in tax obligations for you or your business, namely Corporation tax and Class 1A National Insurance for the business, and Income Tax for you.

Corporation tax at the rate of 32.5% appears when the director's loan balance at the end of the Corporation Tax accounting period exceeds £5,000 and is not repaid within 9 months of the end of this period. The business uses form CT600A to declare the loan balance, the corporation tax paid on it, and to claim the corporation tax back after the loan has been repaid.

For director's loans that exceed £10,000 at any time of the year and is interest-free, or the interest rate is below the official rate of interest (2017 - current is 2,5%), the company must treat the uncharged interest as an employee's benefit. The written off director's loan is also seen as a benefit. Employer must report these benefits on form P11D, deduct and pay Class 1A National Insurance (for 2022 - 2023 is 14.53%) on the value of the benefit.

If the loan is 'written off' or not repaid, the director must pay Income Tax on the loan through a Self-Assessment tax return.

The same rules apply to the loans granted to any other employee.