Consequences of overdrawn Director’s Loan Accounts

1st November 2017

 

Most people who form a limited company understand that it is a separate legal entity, many however, especially those who previously traded in an unincorporated form, do not fully appreciate what this means in respect of taking money out of the company.

In a sole trader situation the proprietor is free to withdraw money from the business as he/she wishes, however this is not the case with a company.

Where a director withdraws funds from a company in excess of their remuneration (normally salary and/or dividends) these withdrawals are set against any balance owing to the director (perhaps money loaned to the company to cover start up costs, or undrawn dividends, for example).

Where there is an insufficient balance available to cover these withdrawals, this creates an overdrawn loan account situation, and potentially two tax issues:

 

  1. S455 tax

Where a close company Director’s Loan Account remains overdrawn at the year end, and the balance is not repaid to the company within nine months, the company will be subjected to tax at 32.5% on the amount outstanding.

This tax is repayable once the loan has been cleared, however repayment is not always quick. The due date for repayment is nine months and one day after the end of the year in which the loan was repaid. Dependant on the timing of the loan repayment, this could mean a delay of around twenty one months before the tax is due for repayment.

 

  1. Benefit in kind

Where an overdrawn loan account exists, unless the director is charged interest or the loan is provided for a qualifying purpose, if the loan exceeds £10,000 at any point during a tax year, the company must report the value of the ‘benefit ‘, calculated as defined by HM Revenue & customs, on a P11D form.

The company will be charged Class 1a National Insurance at 13.8%, and the director will suffer tax between 20% and 45% (dependant on their tax band) on the value of the benefit.

One final point to note is that overdrawn Director’s Loan Accounts must be disclosed in the company’s accounts that are filed at Companies House, and the details are therefore available for public viewing.

With planning the above pitfalls can often be avoided.



 
Other items in Blogs
 
Vanessa Pearson
13th December 2019 April 2020 Proposed IR35 changes: Status appeals process

As the planned changes to who determines IR35 status are fast approaching, contractors would be well advised to review their contracts on HMRC’s updated CEST (Check Employment Status for Tax) tool. Having provided answers to questions regarding substitution, control and nature of the work, the updated tool will give HMRC’s view of the workers employment…

Read More »

Ben Kilby
12th December 2019 VAT Surcharge

Have you or your business received one between 23 April 2018 and 31 January 2019?   If so, you may want to check if it has been dated. If it has not been dated you may be in for a refund. Any surcharge liability notice or surcharge liability notice extensions are invalid if they have…

Read More »

Lucy Bayliss
25th November 2019 Don’t let your tax bill affect your festive joy. Instead, spread your tax payments throughout the year!

With the festive period fast approaching, it is easy to lose sight of your self-assessment tax return!   If you are employed or receiving a pension and you file your return before 30 December 2019, you can elect to have your tax collected through ‘Pay As You Earn’ (PAYE) rather than paying one lump sum…

Read More »

Ian Piper
22nd November 2019 2019 Growth: Missing in action?

(Data Source) As another year draws to a close, local SME businesses will be forgiven for looking forward to drawing a line under it. With 2019 sales growth barely nudging 1%, it has been a year of focusing on not slipping backwards, rather than the usual mantra of continually signing up new accounts.  When commentators…

Read More »

Mark Burrows
21st November 2019 Avoiding Self Assessment Tax Scams

HM Revenue & Customs have reminded Self Assessment taxpayers to watch out for fraudsters as the tax return filing deadline of 31 January approaches.   HMRC say they have received nearly 900,000 reports of suspicious phone calls, texts or e-mails from scammers pretending to be the tax authority.  Most of these messages were about fake…

Read More »

Scott Bishop
20th November 2019 Postponement of planned Corporation Tax reduction

Boris Johnson has announced plans to postpone the cut in Corporation Tax to 17% (down from 19%) that was due to take effect from 1st April 2020 in order to save £6bn, stating that the money would be better spent on other ‘national priorities’,  including the NHS.   It is not clear when, or indeed…

Read More »