What tax may you and your company pay on overdrawn or written director’s loan account?

Corporation Tax

Company Penalty charge on outstanding loans to shareholders:  

• When your (director’s) loan is outstanding in the company accounts for more than 9 months 1 day after the company’s accounting period end, your company will have to pay for penalty tax (s455 tax charge) at 33.75% of the outstanding loan balance by 9 months and one day after the end of the accounting period in which the liability arises with normal corporation tax.
• When you repaid the loan in full or in part, HMRC will repay the s455 tax back to your company fully or proportionally after 9 months and one day after the end of the accounting period in which the repayment is made.
• Your company cannot deduct the written off loan amount for corporation tax purpose.

Taxable benefit: if the loan is interest-free and exceeds £10,000

• If your (director’s) loan from your company exceeds £10,000 and you don’t pay for interest at HMRC’s official rate of interest, then you will get a taxable benefit. 
  • Your company needs to report the taxable benefit of interest on form P11D.
  • Your company needs to pay for Class 1A NICs on the benefit with form P11D(b).
  • You will pay for tax on the benefit received.

Taxes on written off overdrawn director’s loan

When your company (Close) company writes off or releases your loan:

1. If you are shareholder, the amount written off is treated as a distribution (dividend) and you pay for income tax and Class 1 NICs as well despite of being ‘dividend’, or
2. If you are not a shareholder, the amount is taxable as an employment income and you pay for PAYE and NIC on the grossed up written off loan.