Director/shareholders have a unique position with their companies for tax purposes. Usually, they can decide when and how to withdraw funds from their business, but these withdrawals can have unforeseen tax effects.
Salaries and dividends
If amounts drawn are salaries or dividends the tax implications can be planned for and will form part of the annual tax return submission. Likewise, if directors withdraw funds that they have previously loaned to their company this will create no tax issues.
Overdrawn directors’ loans
If directors treat their company and director’s loan as a private overdraft – the director ends up owing their company funds – then we have a situation where unexpected tax and NIC liabilities can arise.
These tax issues include:
Benefits in kind
A company that lends more than £10,000 to a director is obliged to charge interest on the loan. The rate charged must be at least 2.25% (from April 2020, previously 2.5%) otherwise the taxman will treat the difference as a benefit in kind. This would increase the director’s income tax and the company’s NIC liabilities.
Increased corporation tax
The more significant tax liability arises if an overdrawn directors’ loan account remains unpaid nine months after the company year end. If so, an additional corporation tax payment would be due based on 32.5% of the loan outstanding.
There is no £10,000 tax -free limit when this charge is applied. All of the outstanding loan balance is subject to the 32.5% calculation.
This extra company tax can be claimed back if and when the loan is repaid but not until the accounting period in which the loan is repaid. There are also anti-avoidance provisions in place that will counter any attempts to pay off the loan and then borrow the funds back after a short period of time.
Is your director’s loan overdrawn?
During these difficult times we will all need to manage our finances with care and aim to avoid strategies that create unwanted tax liabilities. If you are presently building up an overdrawn position on your loan with your company please do not hesitate to contact the Ledger team today so we can devise a plan to regularise your loan and mitigate any tax issues.