The Director's Loan Account: How Taking Money Out Becomes a Tax Bill

Money taken from the company that is not salary, dividend or expenses is a loan. Leave it outstanding nine months past the year end and the company pays 33.75% on it.

Most directors do not decide to borrow from their company. They take money out through the year, intend to sort it out at the year end, and discover that what they have created is a loan with a tax charge attached.

What makes it a loan

Money leaving the company is one of four things: salary through payroll, a properly declared dividend, reimbursement of a genuine business expense, or a loan to you. There is no fifth category.

Paying a personal bill from the business account is a loan. Regular drawings taken on the assumption that dividends will be declared later are a loan until those dividends are actually declared, with the paperwork to prove it.

The nine-month clock

If the account is overdrawn at the end of the accounting period, the company has nine months and one day from the year end to clear it. Miss that and the company pays 33.75% of the outstanding balance under section 455.

On a £30,000 overdrawn balance, that is £10,125 — payable by the company, on money the company already paid out.

It comes back, eventually

Section 455 is a deposit rather than a permanent cost. Repay the loan and the tax is refunded. The timing is the problem: the refund is due nine months after the end of the accounting period in which the repayment was made. Repay in month one of a new year and you may wait the better part of two years to see the money.

The £10,000 benefit

Separately, if the balance exceeds £10,000 at any point and you pay no interest — or interest below HMRC's official rate — the shortfall is a taxable benefit in kind. It goes on a P11D, you pay Income Tax on it, and the company pays Class 1A National Insurance.

Charging yourself interest at the official rate removes the benefit charge. The company then has interest income to declare, so it is a trade rather than a free fix, but it is often the tidier route.

Clearing it

Three ways, in rough order of preference:

• Declare a dividend — only if there are distributable reserves; a dividend from a company without profits is unlawful and creates a bigger problem
• Vote a bonus — deductible for the company, but carries PAYE and National Insurance, so usually the expensive option
• Repay it — from personal funds, and genuinely, not for thirty days

Avoiding it entirely

Keep drawings deliberate. Set a regular salary, declare dividends formally with board minutes and vouchers as you go rather than in arrears, and keep the company account for company costs. The directors who end up with a section 455 charge are almost never the ones who planned to borrow — they are the ones who never got round to writing anything down.

Getting help with this

AJH Accountants handles limited company for clients across the UK. We deal with HMRC, tell you what you can claim, and file on time, so nothing rests on you remembering a deadline. See how the service works, ask for a fixed-fee quote, or call the office on 01204 840303.

Originally published at ajhaccountant.co.uk/blog/directors-loan-account-overdrawn.