In many family and personal companies, the boundaries between company and director finances can sometimes blur. It’s not unusual for directors to withdraw money from the company for personal use or, on the flip side, to lend money to the company. Sometimes, the company may pay a director’s personal bills, or a director may personally pay for company expenses.
The director’s loan account (DLA) records all these transactions between the director and the company, working much like a bank account. By the end of the company’s financial year, this account could show a few different scenarios:
- It may have a zero balance.
- It could be in credit, meaning the director has lent money to the company or covered company expenses.
- Or it could be overdrawn, meaning the director owes money to the company.
What Happens if the DLA Is Overdrawn?
If your director’s loan account is overdrawn, it could have tax implications for both you (the director) and your company. The exact outcome depends on the loan balance and whether it’s cleared before the company’s corporation tax due date, which is nine months and one day after the company’s year-end.
If there’s an outstanding balance by the corporation tax due date, your company will have to pay a tax charge on the overdrawn amount. But this isn’t part of the regular corporation tax—it’s a separate charge known as section 455 tax, named after the relevant section in the Corporation Tax Act 2010.
Understanding Section 455 Tax
Section 455 tax is calculated at a rate of 33.75%, aligned with the dividend upper rate. One benefit is that this tax is refundable. When the loan is eventually cleared, the section 455 tax becomes repayable nine months and one day from the end of the accounting period in which the loan is repaid.
However, you can avoid paying section 455 tax entirely if the loan balance is cleared before the corporation tax due date. This can be done in several ways:
- Paying personal funds into the company.
- Declaring a dividend to cover the loan amount.
- Paying a bonus to offset the balance.
That said, each of these options comes with potential tax consequences, and sometimes, it may be more cost-effective to pay the section 455 tax and claim it back later when you can settle the balance in a more tax-efficient way.
When Does It Impact the Director?
If the overdrawn loan balance exceeds £10,000 at any time during the tax year, the director will be liable for a benefit-in-kind charge. This is based on the official interest rate for the loan, assuming the director isn’t paying any interest on the balance. Additionally, the company will need to pay Class 1A National Insurance at 13.8% on the taxable benefit.
However, if the loan balance stays under £10,000, there’s no tax or Class 1A National Insurance to worry about. This allows a director to borrow up to £10,000 for up to 21 months (if taken at the beginning of the accounting period) tax and interest-free—potentially a handy benefit.
Need Help Navigating Director’s Loan Accounts?
Managing a director’s loan account can be tricky, especially when it comes to understanding the tax implications. If you’re unsure of the best approach for your situation, we’re here to help.
Contact Jon Davies Accountants today for expert, friendly advice on keeping your finances in check and minimising unnecessary tax payments. Let’s work together to make your business thrive.
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