We have written about director’s loans before, but it is an important area that we frequently discuss with our clients and, as such, it is worth revisiting. In brief, a director’s loan account is the balance at any one time that either the company owes to a director or a director owes to the company.

What is a director’s loan – positive balance
As a director, any money you pay into the company bank account or any company expenses you meet personally create a loan from you to the company. Such loans can also be created on incorporation or if a dividend is declared but not taken immediately as cash. While the balance on your director’s loan remains positive (i.e. the company owes you money), the funds are tax paid and available for withdrawal from the company, funds permitting. As a side note, wherever possible it is best to use the company bank account to meet company expenses rather than complicating things by paying personally.

What is a director’s loan – negative balance
There are three ways to draw funds from your company:

• As a salary through PAYE
• As formally declared and minuted dividends
• As drawings from a positive director’s loan account

If you continue to take drawings (other than salary or formally declared dividends) to the extent that the positive balance on your director’s loan account is used up, you will move into the position of having a negative balance, otherwise known as an overdrawn director’s loan account. In other words, you now owe the company money.

What are the consequences of an overdrawn director’s loan account?
An overdrawn director’s loan account can give rise to an additional corporation tax charge, known as S455 corporation tax. From April 2022 this tax is charged at 33.75% (previously 32.5%) and it can be recovered once the loan has been repaid. The S455 tax is charged on any loan that remains outstanding nine months after the company’s year end. This means that even if you have an overdrawn director’s loan account at the year end, if you are able to repay the loan within nine months, the additional tax will not become due.

It should also be noted that there is a time delay in being able to recover any S455 tax once the loan has been repaid.

How to repay a loan
Director’s loans can be permanently repaid either by paying funds into the company, or by declaring additional dividends but not drawing out the cash. For the purposes of the S455 calculation, any dividends declared within nine months will reduce the loan, whether drawn as cash or not.

How to avoid the situation
We can help put in place a dividend plan for you that would mean you could potentially avoid the situation of having an overdrawn loan account in the first place. This is done by preparing a personal budget through discussions with you and preparing a plan for how you can draw the funds from the company that meet your requirements, but that are tax efficient and do not lead to your loan account becoming overdrawn.

Please get in touch if you would like more information.