Interest on Director Loan

[Stay in Bed Instead]

Hey all.

Just a quick question if I may.

If my DLA is overdrawn by more than £10,000 at any point in the year, do I need to pay interest for just the period I exceeded £10,000 or for the whole year even when the balance is below £10,000?

[anonymous-user]

It’s not so much the interest, but the tax / Ni / reporting that you need to think about too

Start here

https://www.gov.uk/directors-loans/you-owe-your-co...

[Stay in Bed Instead]

I'm aware that it has to be repaid within 9 months of the fye. In fact, it will be repaid 6 days after.

If I pay interest there is no BIK tax/NI issues.

[Eric Mc]

There are two strands of tax that need to be considered with overdrawn director's loan accounts.

Firstly, if the lender (i.e. the director's own limited company) does NOT charge interest at or above the set HMRC rate - currently 2.5% - then the director is deemed to have received a beneficial loan and will need to declare this "Taxable Benefit" under the Benefit in Kind rules. This only applies to loans exceeding £10,000. The benefit charge is calculated based on how long the loan balance over £10,000 was in existence so will be time apportioned if less than a full tax year


Secondly, overdrawn loan accounts are technically illegal under Company Law and HMRC insists that overdrawn loan accounts (of any size) in existence at the company's end of financial year date be separately declared as a note to the accounts. This is so HMRC can levy a Section 455 Penalty Corporation Tax charge on the outstanding balance. This charge is calculated by the company and added to their normal Corporation Tax bill. The current S.455 penalty charge is 32.5% of the outstanding loan balance.

Therefore, if the the director owed (say) £10,000 to the company at the balance sheet date, the company would have a S.455 charge of £3,250 in addition to any normal Corporation Tax liability.

If and when the loan is repaid, the S.455 penalty will be repaid but that can be a long and time consuming process.

[Stay in Bed Instead]

Thanks Eric.

The loan would be repaid well before the S455 tax charge is due, so I understand will not physically have to be paid to HRMC.

[Eric Mc]

Stay in Bed Instead said:

Thanks Eric.

The loan would be repaid well before the S455 tax charge is due, so I understand will not physically have to be paid to HRMC.

The BIK rules may still apply.

[walamai]

This is the complete opposite of what OP is asking about and irrelevant to the thread. You're basically just posting a random advertisement!

Edited by chris.mod on Monday 27th January 15:58

[Stay in Bed Instead]

Eric Mc said:

The BIK rules may still apply.

In what way?

[Eric Mc]

Depends on whether the company charges you interest for the loan and what rate is charged.

Don't forget also that if the company DOES charge you interest, the company will now have interest income on which it will need to pay Corporation Tax.

[Stay in Bed Instead]

If I am going to pay interest it would be somewhat pointless not paying the HMRC minimum to avoid any BIK.

Yes, I appreciate that the interest will add to the profit.

[Mr Overheads]

walamai said:

This is the complete opposite of what OP is asking about and irrelevant to the thread. You're basically just posting a random advertisement!

Happy if mods want to remove.
I've declared my link and I'm not one of the posters that has a single figure post count that spams a thread with an advert. With 1000's of posts none of which are plugs surely 1 can quietly slip through.

[Eric Mc]

I don't think so.

[Eric Mc]

Stay in Bed Instead said:

If I am going to pay interest it would be somewhat pointless not paying the HMRC minimum to avoid any BIK.

Yes, I appreciate that the interest will add to the profit.

No problems with that. I just thought you should be aware as to how these things work. After all, you were asking the questions.