We are often asked what needs to be considered regarding company law and tax when a director of a limited company goes overdrawn on their loan account. While going overdrawn on a loan account is not a problem in itself, there are a number of things to consider before doing so.
Seeking approval from the company
For loans under £10,000, the director does not need to get the approval of the other company directors to withdraw the loan.
For loans over £10,000, the director must get approval from the company directors in order to withdraw the loan.
However, in both cases, the company may ask for immediate repayment of the amount borrowed at any time.
Overdrawn loan accounts and tax
So long as the loan isn’t calculated as payment of a salary or bonus, there aren’t any tax charges on overdrawn amounts. If the money is treated as earnings then PAYE will apply (you can look up HMRC’s guidance note EIM42280 for more about this).
However, there are tax liabilities for the period the loan is outstanding. A benefit in kind charge will be made if the loan exceeds £10,000 during the tax year, although if the director pays interest on the loan, the benefit in kind can be reduced. This is only possible if the company holds a CTA 2010 s455 tax liability, if the loan is still outstanding 9 months after the end of the accounting period. The liability is 32.5% of the amount of the outstanding loan.
What happens when a loan is written off?
There will be tax implications if a loan is written off. The money loaned to the director becomes treated as a dividend and therefore will be subject to income tax (Class 1 NIC). However, if the director repays the loan, the company can get a refund of the s455 tax from HMRC.
If you have queries about tax or company law, we’d be happy to discuss them with you.
Please contact us at firstname.lastname@example.org and one of the team will be in touch.