I have an overdrawn director’s loan account in my limited company. What are the tax implications if I do not have the funds to pay this back?
An overdrawn director’s loan account may create tax implications for both the company and its director.
When a director who owns at least 5% (or less and loan greater than £15,000) of the ordinary share capital of a company, is given a loan which is not repaid 9 months of the company year end, the company will be required to pay tax under s455 CTA 2010. Section 455 tax is payable at 32.5% of the outstanding loan balance and is due 9 months and one day after the end of the accounting period in which the loan was provided.
For personal tax purposes, the director will also incur a benefit in kind charge if the loan exceeds £10,000 at any time during the tax year however if the director pays interest to the company then the benefit can be reduced and even eliminated if the interest is paid at HMRC’s official rate. The taxable benefit is required to be reported on a form P11D and Class 1A NICs will also be payable by the company at 13.8%.
If the loan is later written off. The director is treated as receiving a dividend equal to the amount of the loan. The amount written off is also subject to Class 1 NICs and is not an allowable expense for corporation tax purposes.
When the loan is written off completely or repaid by the director, the company will then obtain a refund of the s455 tax previously paid, 9 months and 1 day after the end of the accounting period in which the loan is repaid.
Where a loan is repaid and then a similar sum is advanced shortly after i.e. within 30 days, the repayment may be matched to the later advance, the effect being that there is no actual repayment and no refund of S.455 tax.
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