If you are a director of a small company you may have made private payments using the company's bank account or other resources. Unless these private amounts are reimbursed to the company you would owe money to your company - in accountant speak you would have an overdrawn director's loan account.
There are three principal tax and NIC consequences:
1. Your company may have to make a corporation tax payment based on the overdrawn balance.
2. Unless you pay an HMRC agreed rate of interest on your loan you may suffer a benefit in kind charge.
3. If a benefit in kind charge does apply, your company will also need to pay Class 1A National Insurance contributions.
There are ways to mitigate, or eliminate, these various charges as long as you comply with the relevant regulations. For instance:
• If you repay any overdrawn loan before the end of your business accounting period, or within nine months of this date, you can avoid the 25% corporation tax charge.
• Even if you are unable to repay your loan within the nine month period, when you do subsequently repay the loan you can apply to have the 25% corporation tax refunded. There will be a delay in this process.
• As long as you have paid interest, at the agreed HMRC minimum rate, on your loan account, there will be no benefit in kind charge. If this is so, your company will also have no Class 1A NIC to pay.
If you want to safeguard your tax position regarding a current director's loan you may have with your company, please call so that we can work out the most effective strategy.
Disclaimer – Please note: The ideas shared with you in this article are intended to inform rather than advise. Taxpayers’ circumstances do vary and if you feel that tax strategies we have outlined may be beneficial it is important that you contact us before implementation. If you do or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.
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