As a director, have you ever considered taking a loan from your company?
If so, it’s important to be aware of the potential risks associated with an overdrawn director’s loan account (ODLA).
What is an ODLA?
An ODLA arises when a director takes a loan from the company, and the loan is not repaid in full. This can have several implications for both you and your company.
What are the personal tax implications?
You may be subject to an income tax charge, which is calculated at the higher rate of tax (currently 40 per cent). This can occur if the loan is overdrawn by more than £10,000 and is interest-free.
If you are a director or shareholder and owe your company more than £10,000, you must treat the loan as a benefit in kind (BIK).
As such, you must deduct Class 1 National Insurance and report the loan on a personal Self-Assessment tax return.
What are the corporate tax implications?
If the loan is not repaid within nine months of year-end, your company may receive a repayable Corporation Tax charge, under Section 455 of the Corporation Tax Act.
This is calculated differently depending on whether the loan was taken out before the beginning of the current tax year.
For loans taken out the current tax year a rate of 32.75 per cent applies and for loans taken out after the tax year began a rate of 33.75 per cent of the outstanding amount.
While the loan remains unpaid or is yet to be repaid, interest will be added to this Corporation Tax charge.
This can be repaid either by cash or by declaring dividends, if there are sufficient profits and/or reserves. You cannot, however, reclaim any interest paid on the Corporation Tax.
What if the ODLA occurs in insolvency?
Having an ODLA when your company is facing insolvency or liquidation can lead to serious financial difficulties.
When a director’s loan account is overdrawn during insolvency, it signifies that the company does not possess sufficient funds to repay the debt in its entirety.
This can occur if the company has been operating while insolvent, or if outstanding debt is greater than the company’s assets.
How can you avoid an ODLA?
It is vital to ensure that the loan is repaid in full and on time, to avoid incurring any of these potential risks.
Although financial difficulties such as the above can seem daunting, with the right advice and support, you can work to address the issue and get your company back on track.
Are you facing an overdrawn director’s loan account and need advice? Contact us today.