Our website uses cookies to enhance the visitor experience (what's a cookieCookies are small text files that are stored on your computer when you visit a website. They are mainly used as a way of improving the website functionalities or to provide more advanced statistical data.). Are you happy for us to use cookies during your visits?
Please note: continuing without making a choice equates to giving us your consent, which you can withdraw at any time via our cookies policy page.

Overdrawn Directors Loan Account

Newsletter issue - January 09.

If you borrow funds from your own company or get it to pay personal bills on your behalf, there could be additional tax bills for both you and the company unless you repay that money to the company quickly.

Personal Tax

Where the amount you owe to the company exceeds £5,000 at any time in the tax year, and you have paid interest at less than the official rate on this loan there will be an income tax charge on you personally. The official rate has been set at 6.25% since 6 April 2007 in spite of the massive cuts in the Bank of England interest rates since then.

Corporate Tax

Where the loan is still outstanding nine months after the company's year end the company has to pay a tax charge equivalent to 25% of the loan, known as a 'section 419' charge. When the loan is eventually cleared this section 419 charge can be reclaimed by the company, but only when its next corporation tax bill is due.

What to do

If you do owe your company a significant amount you could either:

  1. Use other personal funds to reimburse the amount you owe; or
  2. Get the company to pay you a dividend or a bonus that is set again the loan to bring the amount you owe back to zero; or
  3. Ask the company to write-off the loan.

Implications

Option 1 creates no further tax charges for you or the company, so it's the best in that respect.

Option 2 generates more tax for you, particularly if you already pay higher rate tax. In that case you will have to pay 25% of the net dividend in tax but you won't have received a cash dividend to give you the funds to pay that tax. The company may have to pay you a higher dividend to give you enough cash to pay the higher rate tax due. The company must deduct PAYE and NICs from any bonus it pays, so can often be more expensive and it must have the cash to pay that tax and NI to the Taxman.

Option 3 the loan write-off, is treated as a distribution by the company at the date of the write-off. This is taxed as a dividend in your hands, complete with the 10% tax credit, but it is not actually a dividend. The company cannot claim a deduction against corporation tax for the amount of the loan written-off. The Taxman may also argue that national insurance contributions are due on the amount of the released loan, as if it was a payment of salary.

If you owe your company money please discuss the situation with us as soon as possible as the most tax efficient solution will vary depending on your circumstances.

  • Auto enrolment icon

    Auto Enrolment

    Workplace pensions rules are changing.
    Be prepared for auto enrolment, see how we
    can help and read up on our guidance notes.

    More

  • Cloud accounting icon

    Cloud Accounting

    With our online bookkeeping packages, our support
    services are only a click away.
    Discover cloud accountancy solutions to bring your finances up to date.
    More

  • Pay less tax icon

    Pay Less Tax

    Our experienced tax advisors can help you
    make the most of your options to reduce
    your tax bills.

    More

  • Make more profit icon

    Make More Profit

    From business plans to management accounts,
    our business services will ensure you are in
    control of your business finances.

    More

  • Source finance icon

    Source Finance

    Our experienced partners can guide you
    in getting the finance you need to make
    your business grow. Read our guides or
    contact us for a free consultation.
    More

  • Outsource your payroll icon

    Outsource Your Payroll

    Let us handle payroll compliance for your
    business. We can deal with HMRC on your
    behalf, and take the stress out of RTI.

    More