A director borrow money from his/her company but they must comply with the 2006 Companies Act. A shareholder approval (by ordinary resolution, subject also to the provisions in the articles) is required for loans in excess of £10,000 (£50,000 if the loan is to meet expenditure on company business). Also, the company should agree loan terms and have supporting documents.
Where there is an overdrawn director’s account there is potentially a S455 charge on the company and a taxable benefit on the director in respect interest-free loan.
s 455 CTA 2010 – Company tax charge
If a director (or any other participator in a close company) leaves a loan account outstanding for more than 9 months after the company’s accounting period end, the company will be required to pay tax under s.455 CTA 2010. This is payable at 32.5% of the outstanding loan balance and becomes due 9 months after the end of the accounting period. When the loan is repaid in full or in part s.455 tax is wholly or partly repayable 9 months after the end of the accounting period in which the repayment is made. The Revenue’s online form to reclaim S.455 can be found here.
Taxable benefit on the director
If the overdrawn on a director’s account with the company exceeds £10,000 it is treated as a loan. A taxable benefit will arise on the loan when the employee does not pay interest to the employer at HMRC’s official rate of interest. The cash benefit is the difference between interest calculated at HMRC’s official rate and the interest paid. The taxable benefit of interest calculated is required to be reported on form P11D. This will also be liable to Class 1A NICs
Write off an overdrawn director’s loan
When a company writes off a loan made to a director the amount is treated as a dividend and as earnings for NICs purposes. In addition, it is an unallowable expense for Corporation Tax purposes.
Consider declaring a dividend to clear the loan as this will avoid the NICs charges.
Published 13 September 2017.
Updated 15 October 2017.