OVERDRAWN DIRECTOR’S LOAN ACCOUNT
This is guidance on the rules for anyone that has an overdrawn director’s loan account.
You are probably aware that in the eyes of the law (including tax law) you and your company are treated as separate “persons”. Therefore, using your company’s money for your private expenses, unless it has been taxed as salary or benefits, counts as a loan for which there can be tax consequences. The record of such transactions is usually referred to as your director’s loan account (DLA).
Personal Tax – Benefit in Kind
If your DLA is in deficit by more than £10,000 at any point in the tax year and you do not pay a commercial rate of interest, then it is a benefit in kind on which you will have to pay tax.
This is reported to HMRC via a P11D.
Company Tax Charge S455
A more significant tax charge potentially falls on your company where you owe it money. It applies to any amount of debt. If your DLA is in the red, the tax (known as the S.455 charge) payable is equal to 32.5% of the amount you owe at the end of its financial year.
However, repaying what you owe within nine months after the end of the financial year in which you borrowed the money, prevents the s.455 charge from being triggered.
If you cannot repay the amount of the overdrawn loan account within 9 months of the end of the financial year, then you must pay this extra tax along with the company’s corporation tax liability.
However, when the loan account is repaid, we can write to HMRC who will repay the S455 tax back to the company. HMRC will not make the repayment until nine months after the end of the accounting period in which the loan is repaid to the company.
Repayment of overdrawn loan account
If you cannot pay the debt back to the company from private means it can be repaid using alternative methods. The three most common methods are listed below:
- Extra Salary as a Bonus
You would include in the payroll a bonus which you would not take from the company but use the net pay to pay off your loan.
This is a corporation tax (CT) deductible expense. The downside is you must account for PAYE tax and NI to leave enough to clear the debt after these have been deducted. Even with the CT relief, it is usually the most expensive option.
2. Writing the Loan off
There is no CT deduction for this. Plus, HMRC might argue that the amount written-off counts as earnings for NI purposes. However, the tax treatment is the same as a dividend.
Therefore, you will need to include the written off loan in your personal tax return and pay tax on this loan at either 7.5% (lower rate) or 32.5% (higher rate) tax.
Make sure the write-off is done formally with a legal deed and a Board minute.
Whilst there is no CT deduction, this is usually the most tax-efficient option because you will pay less income tax. However, the company must have sufficient accumulated profits to cover the dividend to all shareholders. The repayment is best done as a book entry, i.e., you declare the dividend but, instead of paying it to you in cash, it is entered as a credit to your DLA.
An overdrawn director’s loan account is something that should be avoided. It is potentially something that HMRC will look into as there is the opportunity of gathering more tax (32.5% on the overdrawn loan not repaid within 9 months of the financial year end).
Speak to PWA if you have any concerns about this and we can advise you on the best way to avoid and deal with this issue.