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

Corporation Tax

 Penalty charge to Close company  on outstanding loans to shareholders:

• Close company is a company which is controlled by 5 or less 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% on the outstanding loan balance, by 9 months and one day after the end of the accounting period in which the liability arises, together 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.
• Where the loan was written off, your company cannot deduct the written off loan amount for corporation tax purpose.

Tax on the 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 have to 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 have to pay for PAYE and NIC on the grossed up written off loan.

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

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