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In personal and family-run companies, the division between a company’s finances and a director’s personal finances can sometimes become unclear. A director might take money out of the business for personal use or might lend their own funds to the company. The company might pay some of the director’s personal bills, and the director might personally settle certain company expenses. The director’s loan account simply records all financial exchanges between the director and the company, working much like a bank account.
At the end of the company’s financial year, the director’s loan account might show a zero balance. Alternatively, it could be in credit if the director has contributed more funds or covered company costs. Another scenario is that the director’s loan account becomes overdrawn, meaning the director actually owes money back to the company.
Overdrawn director loan account
An overdrawn director loan account may create tax complications for both the director and the company. The exact outcome depends on the amount owed and whether it is repaid by the time the corporation tax is due.
From the company’s perspective, if the overdrawn balance remains outstanding on the date the corporation tax payment is due (nine months and one day after the year-end), the company must pay additional tax on this amount. Although this tax is paid at the same time as corporation tax, it is not actually corporation tax. Instead, it arises under section 455 of the Corporation Tax Act 2010 and is usually known as ‘section 455 tax’.
Currently, section 455 tax matches the dividend upper rate, which is 33.75%. Unlike most other taxes, it can be reclaimed once the loan is eventually repaid, with the refund becoming available nine months and one day after the end of the accounting period in which repayment occurs.
The payment of section 455 tax can be avoided if the director clears the overdrawn balance before the corporation tax due date. Clearing the balance might involve the director introducing personal funds, the company declaring a dividend to offset the debt, or even paying the director a bonus. However, if the overall personal tax cost of these actions is higher than the Section 455 tax itself, it might be more cost-effective to pay the Section 455 tax and reclaim it later when a more tax-efficient repayment method becomes possible. Seeking advice from a Tax Advisor, Tax Consultant, or Tax Specialist who offers services like Director’s Loan Account Management, Corporate Tax Planning, Tax Return Preparation, and Section 455 Guidance can help identify the best strategy.
If, at any point during the tax year, the overdrawn balance exceeds £10,000, the director will face a benefit-in-kind charge on the interest at the official rate, and the company will owe Class 1A National Insurance at 13.8% on the taxable benefit. But if the amount stays below £10,000, there is no tax or Class 1A National Insurance to pay, allowing a director to borrow up to £10,000 for as long as 21 months (if taken at the start of the accounting period) without incurring tax or interest charges. This approach can sometimes be worthwhile.
FAQs
We are here to help you with any questions you may have
No, an overdrawn director’s loan account isn’t always taxed. Whether it’s taxed depends on how much is borrowed, when it’s paid back, and the company’s tax deadlines. For example, if the loan isn’t repaid by the company’s tax due date—usually nine months and one day after the end of the accounting period—the company may have to pay a special tax charge.
If the loan is paid back before the deadline, there’s no extra tax. Directors can repay loans using personal money, dividends, or other methods. The timing and way of repayment can affect finances differently. If the loan is fully repaid and all rules are followed, the company might be able to get back earlier charges. It’s important to plan repayments carefully to avoid unnecessary costs or complications.
Our tax advisors can help reduce Section 455 tax by advising on the best ways to repay the loan before the company’s tax deadline. For example, they may suggest repaying the loan with dividends, bonuses, or other methods that minimize personal taxes. They also analyze the company’s and the director’s finances to ensure repayments are planned in the most tax-efficient way. This careful planning can help avoid penalties and save money.
Yes, our tax consultants can suggest smarter ways to repay the loan. Instead of using personal savings, they might recommend aligning repayments with company profits or using dividends to cover the loan. This could help the director avoid higher personal taxes. For example, paying a dividend could reduce the loan balance without increasing the director’s tax bracket. While paying a bonus might also clear the loan, accountants would weigh the tax costs against the benefit of avoiding penalties. Their advice ensures that the repayment method works best for both the company and the director.
If the loan stays below £10,000 during the tax year, things are much simpler. The director won’t face extra tax for benefits (like interest), and the company won’t have to pay Class 1A National Insurance.
This means the director can borrow a small amount without extra tax as long as the loan is managed carefully and repaid on time. Keeping the loan under this limit can make things easier and avoid unnecessary tax issues.
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