Evading Tax Penalties on Excessive Director's Loan Accounts
Do you use your director's loan account?
Posted by Helen Beaumont on 05/04/2023 @ 8:00AM
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 ...
By following these guidelines, directors can efficiently manage their loan accounts and avoid tax charges!
However, when a director's loan account becomes overdrawn, it can lead to additional tax charges. Here's a comprehensive guide on how to avoid these tax charges while utilising a director's loan account in the United Kingdom.
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 33.75% 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 33.75% 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.
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.
Until next time ...
Would you like to know more?
If anything I've written in this blog post resonates with you and you'd like to discover more about the director's loan account, it may be a great idea to give me a call on 01908 774323 and let's see how I can help you.
Helen brings the personal tax planning experience of the top 20 tax companies to Essendon. Formerly of MacIntyre Hudson (with 45 offices nationwide), Helen worked at Chancery for more than 10 years before joining Essendon as the personal tax specialist.
Tax Planning can make a considerable difference to your tax liability. Helen has specialist knowledge and experience in tax planning and uses every opportunity to minimise your tax bill is utilised. By analysing your investments, income, profit and expenditures, Helen will provide strategic tax planning expertise that could offer significant savings, whilst delivering clear, honest advice and guidance.
When Helen is not at Essendon she spends time with her young son and likes going on long walks with the family dog.
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