By Emily Win
There are some technical accounting things that sound boring but you need to know about when you’re running your own business. One of these is the director’s loan account. As well as understanding what it is, it’s important you know the implications of it going overdrawn.
What is an overdrawn director's loan account?
An overdrawn director’s loan account is when the director has taken more money out of the company than they were owed. The company has effectively lent the director an amount of money.
What happens if I have an overdrawn director's loan account?
The general rule is that a director has until 9 months after the end of the financial year to repay an overdrawn director's loan account, without any tax implications. If the overdrawn director's loan account is >£10,000 then additional considerations apply.
How can I reduce the balance of my overdrawn director's loan account?
- Repay the balance from your own personal bank account into the company bank account.
- If the company has enough retained profits then a dividend can be declared and, rather than paying yourself the dividend in cash, the balance owed to you is offset against the amount you owe on the overdrawn director's loan account.
- Any monthly net salary payments owed to you by the company can be offset against the amount you owe on the overdrawn director's loan account rather than being physically paid to you.
What if I have an overdrawn director's loan account at the year-end?
If the balance is not repaid within 9 months of the financial year-end:
- the company’s corporation tax return will need to disclose this balance
- a section 455 tax charge at 32.5% of the balance will be owed to HMRC by the company
- this tax charge can be reclaimed through the corporation tax return in the year that the loan is repaid
If the balance is repaid within 9 months of the financial year-end:
- No disclosure is required in the company’s corporation tax return
- No section 455 tax charge is payable
Does it matter how overdrawn the director's loan account is?
If the balance is >£10,000 and no interest is charged by the company to the director for the loan then:
- This loan is seen as a benefit in kind provided by the company to the director
- The company has to submit a P11Db return and pay National Insurance at 13.8% on the full loan balance
- The director will need to disclose this benefit on their self-assessment tax return and need to pay personal tax on this benefit as well.
- Please note, an interest charge (based on the HMRC calculations and rates) can be paid personally by the director on a loan >£10,000 which will mean the above requirements are no longer applicable.
Any other considerations I need to be aware of?
If an overdrawn director's loan account is repaid and then up to 30 days later the same or similar amount is withdrawn again by a director the HMRC will view that the director didn’t intend to repay the loan in full and the full loan amount will be taxed.
Do HMRC monitor director’s loans?
Yes! HMRC will monitor director's loan accounts which are regularly overdrawn. They potentially could decide that the money is not a loan but a salary, and subsequently, charge Income Tax and National Insurance on the sum.
We suggest that you monitor your director’s withdrawals to ensure you don’t exceed the £10,000 threshold.
Should I repay my overdrawn director's loan account?
Generally, it is preferable to repay an overdrawn director's loan account before the company’s year-end or, failing that, within nine months of the end of the accounting period in which it becomes overdrawn.
If the company enters insolvent liquidation, the director may be forced by the liquidator to repay the loan in order that the company can repay its creditors. The director's personal assets may be at risk if they are unable to repay the company at that point.
It is worth checking that you know your Director's responsibilities, in particular, the implications of breaching these duties when a company goes into insolvent liquidation.
What happens if I never repay the overdrawn director's loan account balance?
If the loan is written off then it is seen as personal income received by the director from the company and is taxed at 32.5%.
How to avoid having an overdrawn directors loan account
By keeping your accounting records up-to-date you'll have a clear view of the balance on your director's loan account whenever you want it. This is far better than discovering at the year-end that you have an overdrawn director's loan account and that you need to declare an additional dividend to repay it. Unexpected dividends mean unexpected personal tax liabilities!
Are you worried about your overdrawn director’s loan account?
If you are worried about your overdrawn director’s loan account then get in touch and we can help you map out a plan to repay what you owe to your company.