Your director’s loan account has drifted into the red. To minimise or avoid tax charges you want to clear the debt. What’s the best way to do it?
Director-shareholder loans
You’re probably aware that in the eyes of the law (including tax law) you and your company are treated as separate “persons”. Therefore, using your company’s money for your private expenses, anything from a meal out with your partner to replacing your boiler, unless it’s been taxed as salary or benefits, counts as a loan for which there can be tax consequences. The record of such transactions is usually referred to as your director’s loan account (DLA).
Personal tax
If your DLA is in deficit by more than £10,000 at any point in the tax year and you don’t pay a commercial rate of interest, it’s a benefit in kind on which you’ll have to pay tax unless an exemption applies. The good news is that the taxable amount is relatively modest. For 2024/25 the amount on which you’ll be taxed is just 2.25% per annum of the average balance of the debt over the tax year in question. This means if the average debt was say, £16,000 and you’re a higher rate taxpayer, you’ll owe just £144 in tax.
Company tax
A more significant tax charge potentially falls on your company where you owe it money. It applies to any amount of debt. If your DLA is in the red, the tax (known as the s.455 charge) payable is equal to 33.75% of the amount you owe at the end of its financial year. However, it’s a temporary tax charge that HMRC repays nine months after the end of the accounting period in which it’s repaid.
Tip. There are exceptions where the charge doesn’t apply. For example, if you owe up to £15,000, you’re a full-time working director and own or control no more than 5% of the ordinary shares. Check the exceptions to see if the charge can be wholly or partially avoided.
Tip. Repaying what you owe within nine months after the end of the financial year in which you borrowed the money prevents the s.455 charge from being triggered.
Repayment
If you can’t pay the debt from private means it can be repaid using alternative methods.
Extra salary as a bonus. This is a corporation tax (CT) deductible expense. The downside is you have to account for PAYE tax and NI to leave enough to clear the debt after these have been deducted. Even with the CT relief it’s usually the most expensive option.
Writing the loan off. There’s no CT deduction for this. Plus, HMRC might argue that the amount written off counts as earnings for NI purposes. However, the tax treatment is the same as a dividend but it can be made as long as it leaves the company solvent. Make sure the write off is done formally with a legal deed or liability remains.
Dividend. Whilst there’s no CT deduction this is usually the most tax-efficient option because you’ll pay less income tax. However, the company must have sufficient accumulated profits to cover the dividend to all shareholders. The repayment is best done as a book entry, i.e. you declare the dividend but instead of paying it to you in cash it’s entered as a credit to your DLA.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.