In order to manage the financial affairs of a company, its directors may occasionally need to borrow funds from their own company. This is referred to as a director's loan account, and should always be repaid ...
Monitor Loan Account Balances: It is crucial for directors to keep a close eye on their loan account balances. This will help them prevent the account from becoming overdrawn, as well as ensure that the funds are repaid within the stipulated time frame to avoid unnecessary tax charges.
Repay the Loan on Time: Directors must repay the borrowed amount within nine months of the company's accounting period end. Failing to do so will result in a corporation tax charge, calculated at 32.5% of the outstanding loan balance.
Declare Dividends: If the company has sufficient distributable reserves, it may be beneficial to declare dividends to clear the overdrawn director's loan account. This can help avoid the 32.5% tax charge, although dividends are subject to personal income tax.
Consider a Salary or Bonus: Directors can opt for a salary or bonus payment to clear their loan account balance. However, this may result in additional income tax and National Insurance contributions. It is important to weigh the costs and benefits of this approach before proceeding.
Take Advantage of the Investment Allowance: Jeremy Hunt recently announced a new investment allowance in an attempt to soften the impact of the much-criticised corporation tax hike. Directors should stay informed about such tax relief measures, as they may provide opportunities to offset some of the tax charges associated with overdrawn loan accounts.
By following these guidelines, directors can efficiently manage their loan accounts and avoid tax charges associated with overdrawn balances. It is always advised to consult with a professional tax adviser such as myself to ensure compliance with UK tax regulations.
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