HM Revenue and Customs and Overdrawn Director Loan Accounts

The Tax Treatment of Overdrawn Director Loan Accounts

How HM Revenue and Customs view and treat overdrawn director loan accounts has two aspects. The first is the company and the second is the director.

The Company

Provided that the shareholders have approved any loan over and above £10,000, there is nothing incorrect with an overdrawn directors loan account.

It is simply an asset of the Company which needs to be repaid, and is essentially treated the same as any other debtor, or customer who has yet to settle their invoice.

However Section 455 of The Corporation Tax Act applies, which says that companies should be charged the higher rate dividend tax in respect of any overdrawn directors loan account, which is currently 32.5%.

Accordingly if a director has an overdrawn loan account in the sum of £100,000 the Company will need to pay £32,500 in corporation tax.

It should be noted that when the director repays that loan account, HMRC will repay that £32,500 back to the Company.

The Director

This is a little more complicated.

Basically if a director has an overdrawn loan account, which is overdrawn by more than £10,000, HMRC will view that loan as a benefit in kind.  The benefit in kind is the difference between the interest paid on the loan and the official rate, which is currently 2.5% in the 2017/18 tax year.  This benefit in kind will need to be reported on the director’s personal tax return and will be taxed in the normal way.  There will also be national insurance contributions that will need to be paid.

If the loan is not repaid and is instead written off, the amount written off will be treated as income and will need to be declared on the directors self-assessment tax return and tax will need to be paid.

Overdrawn directors loan accounts are not straight forward and do need to be dealt with carefully.  If you would like free advice regarding director loan accounts please ring 01326 340 579 or email to discuss the matter or arrange a free meeting.

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