We get lots of questions on overdrawn directors loans, as the devil is in the detail and the timings, we thought it would make an interesting short article:
If your directors loan account is overdrawn by less than £5k then it does not need to be included on your P11D benefits and expenses form and no additional income tax is due on the loan.
If it is overdrawn by more than £5k then there is an income tax charge on the entire balance unless you personally have paid your company interest on the loan at the HMRC approved rate.
Company tax issue
If your loan is outstanding at your company year end - no matter how big the loan is - then it has to be declared to HMRC on the company's Corporation Tax return.
If the loan is still outstanding 9 months and 1 day after your company year end then your company has to pay an additional tax charge of 25% of the outstanding loan balance.
This tax can be reclaimed from HMRC once the director's loan is paid back but it is not a quick process as it must be reclaimed through a future Corporation tax return.
If you are thinking that you can simply pay back a £20k loan 9 months after your year end and then take it back out one week later then you would be wrong - HMRC would simply ignore the repayment for one week and demand the tax due.
Our advice - keep your director's loan account under £5k at all times and pay it off before the company year end each year.
If you have any questions regarding director's loans then do get in touch for advice specific to your situation.