Complexities of overdrawn director’s loan accounts

In this blog you will learn about the tax implications of having an overdrawn directors’ loan account.

What is an overdrawn director’s loan account?

An overdrawn director’s loan account is simply money that a director or a participator in a close company has taken from the company which has not been taxed under PAYE or extracted by means of a dividend which has not been repaid. In essence, the director owes money to his/her company in the form of a loan.

At first glance this may seem an attractive way for a director to extract money from the company, in that tax has not been paid on the money withdrawn in the form of PAYE nor has a dividend been declared which would need to be recorded on the director’s tax return. However, as you may imaging, H.M. Revenue & Customs are not going to allow the director to follow this strategy without receiving a tax bill.

Company taxation on an overdrawn director’s loan account

As noted above, the director owes the loan back to the company. If any of this loan remains outstanding nine months after the company’s year end then the company is liable to Section 455 tax, currently at the rate of 33.75%.

One way of looking at Section 455 tax is that you are loaning this tax to H.M. Revenue & Customs as, when the overdrawn director’s loan is repaid in subsequent years, then the S.455 tax is refundable to the company.

Tax suffered by the director/participator on the overdrawn loan account

If you are a shareholder and director and the loan you receive from your company exceeds £10,000 at any time during the company’s accounting period, then you are treated as being in receipt of an employment related loan. A taxable benefit will arise in cases where you do not pay interest to your company at a rate equal to H.M. Revenue & Customs official rate and this benefit is declared on a Form P11d. The Company would also have to pay Class 1A National Insurance, currently at 14.53% on the benefit in kind.

Call to action

If you have an overdrawn director’s loan account and would like advice on how to correctly account for it or how to minimize your tax exposure then please call us on 0212 706 8585.