If you are a shareholder and director, a directors’ loan account can be a useful financial facility both for you personally and for the company as a separate legal entity.
While there are significant benefits to using a directors’ loan account, there are some important considerations to bear in mind.
This is particularly so in the case of overdrawn directors’ loan accounts (ODLA).
What is an ODLA?
An ODLA arises when a director takes a loan from the company, and the loan is not repaid in full.
What are the personal tax implications?
You may be subject to an income tax charge, which is calculated at the appropriate marginal rate of tax, given your overall income for the year. This can occur if the loan is overdrawn by more than £10,000 and is interest-free or below the official rate.
If you are a director or shareholder and owe your company more than £10,000, you can either treat the loan as a benefit in kind (BIK) or charge interest on the loan. If you charge interest at the official HM Revenue & Customs (HMRC) rate which is currently 2 per cent, then an ODLA does not need to be treated as a BIK.
If you do opt to treat the ODLA as a BIK, then you must deduct Class 1 National Insurance and report the loan on a personal Self-Assessment tax return.
What are the corporate tax implications?
If the loan is not repaid within nine months of the accounting year-end, your company will be liable to a Corporation Tax charge, under Section 455 of the Corporation Tax Act.
This is calculated differently depending on whether the loan was taken out before the beginning of the current tax year.
For loans taken out before the current tax year a rate of 32.75 per cent applies and for loans taken out after the tax year began a rate of 33.75 per cent applies to the outstanding amount.
This can be repaid directly by you, through a payroll bonus, or by declaring dividends, if there are sufficient profits and/or reserves, on which you will have to pay the appropriate marginal rate of tax.
What if the ODLA occurs in insolvency?
Having an ODLA when your company is facing insolvency or liquidation can lead to serious financial difficulties.
That is because you will be considered a debtor of the company and will be liable to repay the outstanding loan.
So should an ODLA be avoided?
Not necessarily. Like any loan, repaying a directors’ loan needs to be something that is within your overall means and should be part of your overall financial and tax planning. They become problematic when there are cashflow difficulties in a business or when the business becomes insolvent.
Our team is highly experienced in advising on directors’ loan accounts and can help you make better use of yours, or help you deal with any problems before they arise. In either case, it is always better to deal with matters sooner rather than later.
Are you facing an overdrawn directors’ loan account and need advice? Contact us today.