Director’s loan account
Your company may pay personal expenses on your behalf for which you later reimburse the company, or it might otherwise lend you money. This means you have a variable outstanding debt owing to the company, which is known as a director’s loan account.
Where that debt exceeds £10,000 at any point in the tax year, this triggers a taxable benefit for you based on the nominal interest you should have paid on the loan for the whole period during which the loan was overdrawn (not just the days when the balance was above £10,000). The company also has to pay Class 1A NICs at 13.8% on the value of the benefit.
Say you owed the company £12,000 and that debt was outstanding from 6 April to 5 July 2023, when it was cleared by a dividend. The benefit in kind would be: (2.25% x 12,000) x 3/12 = £67.50. As a 40% taxpayer you would pay tax on this benefit of £27. The company would pay NICs at 13.8% on £67.50 = £9.32.
If your loan from the company was not repaid by the date the corporation tax is due (9 months and 1 day after the end of the accounting period), the company also has to pay a corporation tax charge at 33.75% of the loan. This charge can be recovered when the loan is repaid, but it’s a big incentive to clear the outstanding director’s loan account within nine months of the year-end.
Please discuss with us the most tax efficient way of clearing any loan from your company, but be aware that the value of the loan will be taxable on you if it is waived or written off by the company.