An overdrawn Director’s Loan Account at the end of the financial year should be repaid within 9 months and 1 day after the financial year end to avoid any additional tax charges.
If the loan is not repaid in that time, the company will have to pay 25% of the balance outstanding along with the Corporation Tax charge for that year (from 6 April 2016 the tax charge on outstanding loans increases to 32.5% for loans, advances and arrangements made on or after 6 April 2016). When the loan is repaid the tax is repayable 9 months and one day after the end of the accounting period in which the repayment is made. You must claim it within 4 years.
The loan is efectively repaid when you pay the money into company bank account for a minimum of 30 days.
If the loan is ‘written off’ or ‘released’ you have to deduct Class 1 National Insurance through the company’s payroll and pay Income Tax on the loan through your Self Assessment tax return.
If the loan at any time in the tax year exceeds £10,000 and the director does not pay interest to the company or pays interest at less than the official rate (see the rates here), there is a taxable benefit in kind to be reported on form P11D for the director of the shortfall of interest paid under the official rate. Also, If the loan was more than £10,000 at any time in the year, your company must deduct Class 1 National Insurance and you must report the loan on your personal Self Assessment tax return.
What must be reported in the director’s personal tax return:
• the director owes the company more than £10,000 at any time during the year;
• the director pays the company interest on a loan below the official rate of interest;
• the director is not required to repay the loan because it is ‘written off’ or ‘released’ by the company.
The annual accounts of a company must show the value of any loans outstanding to the directors (and their immediate families) and the maximum balance during the year. The disclosure is required to show the stakeholders who may be owed money by the company, how their cash is being used.
Read our another post about the director’s loan here.
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