The simple answer is yes, but there are tax consequences so it’s important you understand what you are doing.
From time to time Directors of a company may wish to to borrow money from the business and take lump sums out of the business. This is different to their normal salary and dividend payments, and doesn’t include the repayment to them of amounts they previously lent to the business or when being reimbursed for expenses incurred on behalf of the business.
These amounts are not income, are repayable to the company and have tax implications.
S455 tax
Directors’ Loans need to be repaid within nine months of the company’s statutory year end or the unpaid balance will be subject to S455 tax at 33.75%. This is reported on the company’s corporation tax return and is effectively designed to prevent directors withdrawing money from a company and never repaying it, thus avoiding income tax they would pay if they withdrew it as salaries or dividends.
So for example, if your company year end was 31st March and you owed it money as at the year end, you would have until 31st December that same year to repay it in full to avoid the additional tax.
The good news is this charge can be recovered once the balance is repaid so it is not lost, but if the outstanding balance is large it can have serious shorter term cash flow consequences.
Benefits in kind
If the loan is over £10k at any point then it will be considered a benefit in kind. In this case the company will have to pay national insurance and the borrower will pay income tax on the amount of beneficial interest – i.e. the amount the director saves by taking the loan through the company.
At present, the official rate of interest from HMRC is 2%, so the tax and NI would be applied to whatever 2% of the loan balance came out as. If the director pays the company interest at the official rate then there is no benefit and no tax or national insurance is payable.
How can you repay the loan?
You can simply return the funds without any tax implications either from private funds or borrowing externally from the company to stop the S455 and benefit in kind charges. You can also declare a higher dividend to reduce the balance, but these will need to go on your personal self assessment return and be subject to income tax.
However, HMRC has rules against repaying it and then immediately withdrawing the funds again. Sometimes known as bed and breakfasting or window dressing, you will not be considered to have repaid the loan until the balance is cleared for a reasonable amount of time.