If you are a director of a small company you may have made private payments using the company’s bank account or other resources. Unless these private amounts are reimbursed to the company you would become a creditor, owe money, to your company – also known as having an overdrawn director’s loan account.
There are three principle tax and NIC consequences:
- Your company may have to make a corporation tax payment based on the overdrawn balance.
- Unless you pay an HMRC agreed rate of interest on your loan you may suffer a benefit in kind charge.
- If a benefit in kind charge does apply, your company will also need to pay Class 1a National Insurance contributions.
There are ways to mitigate, or eliminate, these various charges as long as you comply with the relevant regulations. For instance:
- If you repay any overdrawn loan before the end of your business accounting period, or within nine months of this date, you can avoid the 25% corporation tax charge.
- Even if you are unable to repay your loan within the nine month period, when you do subsequently repay the loan you can apply to have the 25% corporation tax refunded. There will be a delay in this process.
- As long as you have paid interest, at the agreed HMRC minimum rate, on your loan account, there will be no benefit in kind charge. If this is so, your company will also have no Class 1a NIC to pay.
You also need to remember that an overdrawn director’s loan account, which exceeds £10,000, is illegal under the Companies Act 2006, unless it has previously been approved by the shareholders. This approval needs to be properly documented.
Of course, the correct way to extract profit from the company is by way of salary for the director’s or, if the company has sufficient distributable reserves, by way of dividend for shareholders. This gives rise to personal tax implications.
