Overdrawn Directors Loan Account

[trowelhead]

Hi all,

Jus wondering, i'm getting absolutely hammered with the personal taxes on taking dividends from my business.

Basically, i'm in a position of "kicking the can down the road" somewhat...

For example let's say year one i took (using completely made up figures) 90k dividend and would owe perhaps 20k personal tax on that paid in the next tax year.

Instead of spending 70k and keeping 20k aside, i then take my 90k again next year plus another 20k to cover last years personal tax bill.

So year after my drawings are £110k, meaning perhaps i have a £30k tax bill year after, etc etc

My question is, i believe that a directors loan account can stay overdrawn for the long term if a 32.5% extra corporation tax is paid on the loan amount.

Can this be done long term, any trouble having it sat overdrawn if the extra tax has been paid? (also can be claimed back when cleared)

My purpose to do this would be to take the hit and pay a big tax bill, but inside my company, therefore avoiding me drawing bigger personal amounts year after year


In the above example, i would perhaps take 90k as usual (what i actually spend as such), but leave 30k directors loan (amount i'd usually also draw to pay tax liability personally), pay the 32.5% on 30k - but then put aside 20k personally to pay tax year after, thus resetting this odd position.

Bit complex, but hope it makes sense? Help appreciated All figs used are made up for simplicity but illustrates the point.

Slap on wrist, i do realise i could have avoided this with better planning ahead

[anonymous-user]

trowelhead said:

My purpose to do this would be to take the hit and pay a big tax bill, but inside my company, therefore avoiding me drawing bigger personal amounts year after year

Not a great deal of tax benefit in that - and your accounts will develop a funny smell.

[LivingTheDream]

Reduce your spending

Live on f all for a year

pay your tax bill

reset your odd position

do it properly from then on

[gazza5]

Please don't take this the wrong way - but sounds like your living beyond your means!

I'm not here to say how to spend your money, but I see countless clients when I do there personal tax moaning about tax bills. As I do for all my clients - I then calculate the amount of PAYE and NIC they would have paid if it was salary - they soon shut up moaning! Anyway I digress.

You are right in that if you pay the corporation tax at 32.5% you only pay this once - so if the amount is £30k overdrawn and stays like that for 5 years you don't pay 32.5% every year. The company gets the 32.5% back when the loan is repaid.

The other way is you pay the company "interest" on the overdrawn loan. HMRC have agreed rates on there website. Think its 3.25% off the top of my head - but this may of changed due to the interest rate going up.

Technically I think you should do both - but in practice this doesn't always happen.

You do know if your directors loan account is less than 10k overdrawn you don't need to pay the 32.5% tax - so that would give you a bit of extra breathing space.

Also the government is slightly short of money at the moment - what if come end of October (when budget is) Mr Hammond decides to raise dividend tax to 9.5% from 6th April 2019? You will then be paying more tax in the future and the cycle continues.

[gazza5]

Just to comment further - if this is your first year of self assessment you will have payments on account (paying tax for next year).

Therefore you may well find a 20k tax bill for January plus payment on account of £10k plus payment on account in July 2019 of £10k.

If you were self assessment last year and had payments on account you can ignore the post, it won't be that severe.

[Michaelbailey]

The problem here is your simply not making enough money to support your spendings. You are effectively withdrawing money that you owe the tax man.


Also theres a trap you can fall into (I will keep this as simply as possible)... When thinking about paying yourself dividends you might think I need 90k so I will take 90k dividends but obviously their will be 32.5% tax payable at high rate (for the sake of it we will forget basic rate and allowances).


So then you go well I will take more dividends to pay the tax! That then incurs more tax. For the example of 90k in your pocket you have to work it as follows.

90k/0.675 = 133,333 Then with that the 32.5% on that gives you your net dividends of 90k. But this means you are paying an effective rate of tax of not 32.5% but actually over 48%. 90k in your back pocket costs 43.3k in tax. Tax is huge at these levels and when its not being taken directly out as a PAYE scheme so many people fall foul of spending their tax money and then HMRC lube up and aim for penetration.

You have to change your spending habits I'm afraid, there is no easy fix for it.

[trowelhead]

LivingTheDream said:

Reduce your spending

Live on f all for a year

pay your tax bill

reset your odd position

do it properly from then on

Think this is the answer - fair enough.

My thoughts on leaving the overdrawn account was more to be able to decide on which tax year to pay it down in (ideally 2019) and then literally live off nothing that year and clear the position - lesson learned.

For example if i have drawn 300k over 3 years, i'd rather smooth that out to 100k a year rather than draw 300k in one year, as the tax bill would be massive as most of it falls into higher bracket. Overdrawn directors loan account would seem to do that?

gazza5 said:

Please don't take this the wrong way - but sounds like your living beyond your means!

I'm not here to say how to spend your money, but I see countless clients when I do there personal tax moaning about tax bills. As I do for all my clients - I then calculate the amount of PAYE and NIC they would have paid if it was salary - they soon shut up moaning! Anyway I digress.

You are right in that if you pay the corporation tax at 32.5% you only pay this once - so if the amount is £30k overdrawn and stays like that for 5 years you don't pay 32.5% every year. The company gets the 32.5% back when the loan is repaid.

The other way is you pay the company "interest" on the overdrawn loan. HMRC have agreed rates on there website. Think its 3.25% off the top of my head - but this may of changed due to the interest rate going up.

Technically I think you should do both - but in practice this doesn't always happen.

You do know if your directors loan account is less than 10k overdrawn you don't need to pay the 32.5% tax - so that would give you a bit of extra breathing space.

Also the government is slightly short of money at the moment - what if come end of October (when budget is) Mr Hammond decides to raise dividend tax to 9.5% from 6th April 2019? You will then be paying more tax in the future and the cycle continues.

No offense taken, i'm happy to take advice.

True, i shudder to think if i was earning the same via PAYE/NI

gazza5 said:

Just to comment further - if this is your first year of self assessment you will have payments on account (paying tax for next year).

Therefore you may well find a 20k tax bill for January plus payment on account of £10k plus payment on account in July 2019 of £10k.

If you were self assessment last year and had payments on account you can ignore the post, it won't be that severe.

No not my first year, but first time i've gone into detail trying to plan forward rather than just letting my accountants present the bill to me in Jan

My tax is fully paid, along with payments on account made for this year.

My drawings are always more than i'm spending to cover last years tax bill though...

Michaelbailey said:

The problem here is your simply not making enough money to support your spendings. You are effectively withdrawing money that you owe the tax man.


Also theres a trap you can fall into (I will keep this as simply as possible)... When thinking about paying yourself dividends you might think I need 90k so I will take 90k dividends but obviously their will be 32.5% tax payable at high rate (for the sake of it we will forget basic rate and allowances).


So then you go well I will take more dividends to pay the tax! That then incurs more tax. For the example of 90k in your pocket you have to work it as follows.

90k/0.675 = 133,333 Then with that the 32.5% on that gives you your net dividends of 90k. But this means you are paying an effective rate of tax of not 32.5% but actually over 48%. 90k in your back pocket costs 43.3k in tax. Tax is huge at these levels and when its not being taken directly out as a PAYE scheme so many people fall foul of spending their tax money and then HMRC lube up and aim for penetration.

You have to change your spending habits I'm afraid, there is no easy fix for it.

Thank you - i do get your point. To clarify, i'm not drawing everything out of the company annually, there is plenty left there should i need to draw out extra for tax, more a case of optimising what i'm doing and not always being behind - and yes biggest part of that is simply lowering spending. I've had a few silly cars etc and all that is out of my system.

I do have some money personally i could use to clear the next lot of tax, that may be an option also - however it is in ISAs so i'd rather keep the allowances if possible.

[Michaelbailey]

Cars definitely can rinse you! With the figures you are spouting it sounds like you earn a fair chunk and by living a bit more frugal you should be fine. I assume you have an accountant? If not then they will almost certainly pay for themselves in tax savings!

[Eric Mc]

Have you factored in the Income Tax costs of having an interest free loan from your company i.e. the Benefit in Kind PAYE rules?

[JBM78]

gazza5 said:

You do know if your directors loan account is less than 10k overdrawn you don't need to pay the 32.5% tax

This is not true - the company would still need to pay the s455 tax at 32.5%, if the loan account was still overdrawn 9 months after the accounting year end.

But if the loan is less than £10k there is no taxable benefit-in-kind.

[red_slr]

The free ride we have had on divs for the last, well, forever pretty much, has come to an end. Until last year you could basically earn £50k via a LTD tax free. If there is a husband and wife that's £100k. Not bad. The govt have caught on and as said above its looking like they will continue to rinse small / medium business owners via div tax and probably notch it up each year.

Your issue is that your out of step with your tax. The short term pain of re-setting everything for a year sounds worth it IMHO. Also I would segregate money for tax. I used to put a set amount into an account each year. Usually around 20%. Then if the tax bill was less it was a nice bonus. Adjust for your own case. The last 10 years I have not had to do this because my tax situation has been easier but many of the guys I used to work with back in the day would struggle like hell for a couple of months after their tax was due and I just did not see the point in that.

So going forward cut it back for a year then after that make sure you allocate funds and don't touch till tax bill is paid.

[gazza5]

JBM78 said:

This is not true - the company would still need to pay the s455 tax at 32.5%, if the loan account was still overdrawn 9 months after the accounting year end.

But if the loan is less than £10k there is no taxable benefit-in-kind.

In the eyes of the law you are correct - but in past inspections on CT600's this has never been a problem in the past and the rules have been in place for a long time now (previously 25% tax charge).

[Eric Mc]

gazza5 said:

In the eyes of the law you are correct - but in past inspections on CT600's this has never been a problem in the past and the rules have been in place for a long time now (previously 25% tax charge).

HMRC have been gagging for a method whereby they can clearly see what has been going on with directors' loan accounts during the accounting year for each limited company. Even though there is legislation which states that details of when a loan account is overdrawn during the year and when it was "corrected" are supposed to be shown in the notes to the accounts, this information usually isn't declared and if the loan is the right way round at the balance sheet date, HMRC will not know that the account was overdrawn at any point during the year.

I am convinced that their keeness to have Making Tax Digital introduced for limited company accounts and Corporation Tax returns is driven by the fact that they expect that this type of detailed transactional disclosure will finally give them the tools to see what has been going on with directors' loan accounts throughout the year.

[zubzob]

Company accounts are a snapshot in time on a particular date, so not set up to track interim activity in any consistent manner. As I understand it, any interim activity would need to be a separate note in natural language which is not ideal for any kind of monitoring. So fair game currently?

[Eric Mc]

zubzob said:

Company accounts are a snapshot in time on a particular date, so not set up to track interim activity in any consistent manner. As I understand it, any interim activity would need to be a separate note in natural language which is not ideal for any kind of monitoring. So fair game currently?

Except for the disclosure requirement of Company Law - which everybody ignores. Full transaction details revealed through MTD submissions will finally give HMRC the day to day detail on Directors' Loan Accounts they have always yearned after.

Current rules -

https://www.icaew.com/archive/members/practice-res...

[trowelhead]

Eric Mc said:

Have you factored in the Income Tax costs of having an interest free loan from your company i.e. the Benefit in Kind PAYE rules?

No i had not - will need to ask accountant about that also - assuming that is paid annually until cleared?

[Eric Mc]

trowelhead said:

No i had not - will need to ask accountant about that also - assuming that is paid annually until cleared?

It is declared annually by the employer when he submits the P11D Return of Taxable Benefits details to HMRC.

HMRC uses this data to amend the director's/employee's PAYE Tax Code so they collect the correct PAYE from the salary - which is usually paid to HMRC monthly.

[trowelhead]

red_slr said:

The free ride we have had on divs for the last, well, forever pretty much, has come to an end. Until last year you could basically earn £50k via a LTD tax free. If there is a husband and wife that's £100k. Not bad. The govt have caught on and as said above its looking like they will continue to rinse small / medium business owners via div tax and probably notch it up each year.

Your issue is that your out of step with your tax. The short term pain of re-setting everything for a year sounds worth it IMHO. Also I would segregate money for tax. I used to put a set amount into an account each year. Usually around 20%. Then if the tax bill was less it was a nice bonus. Adjust for your own case. The last 10 years I have not had to do this because my tax situation has been easier but many of the guys I used to work with back in the day would struggle like hell for a couple of months after their tax was due and I just did not see the point in that.

So going forward cut it back for a year then after that make sure you allocate funds and don't touch till tax bill is paid.

Sensible approach - i'm going to do exactly this.

[wattsm666]

You also have to watch overdrawn loan accounts if the business fails for some reason.

goes overdrawn, then the business hits a downturn and is forced into liquidation. Liquidator will want repayment of the loan account to cover creditors. If not repaid it can then lead to bankruptcy.

This is probably less relevant for contractor companies, but is an issue for trading businesses.

[Eric Mc]

Indeed.

Of course, the one creditor that even small contractor companies have to make sure they have adequate funds to clear is the company's Corporation Tax bill.