If you run a limited company, you may have a director’s loan. You may also have discovered that the tax legislation covering director’s loans can be complicated, so we’re here to help.
Heather Long, Crunchers Edinburgh’s senior accountant, looks at your company’s tax obligations when a balance remains outstanding on a director’s loan account at the end of your financial year.
What is a director’s loan account?
As you might imagine, a director’s loan account is a record of money that you have taken out of the company. It is only used to record money that you haven’t previously loaned to the business, and that isn’t a salary, dividend or repayment of expenses.
S455 Corporation tax charge
When a balance remains outstanding on a director’s loan account at the company’s year-end, this can lead to a tax charge on the company called S455.
The loan account balance is calculated as 32.5% on whatever balance was outstanding on the director’s loan account at the year-end. The tax is payable nine months and one day from the end of the relevant accounting period. For example, if year-end is 31st March 2020, the tax must be paid by 1st January 2021.
An overdrawn director’s loan account is effectively an interest-free loan, so in order to deter companies from offering such substantial perks to directors, a temporary tax is raised – S455. This will be repaid back to the company by HM Revenue & Customs (HMRC), once the director repays the loan back to the company.
There is an exception to the rule – where the loan is repaid within nine months of the end of the accounting period, relief is due immediately. Therefore, the S455 is never physically paid. Disclosure is however still required in the company’s tax return.
Beneficial loan and benefit in kind
Further implication of an overdrawn director’s loan account is that it can trigger a benefit in kind for the ‘beneficial loan’. This is triggered if the director’s loan exceeds £10,000 at any point in the tax year.
Exceptions to taxable benefit for a beneficial loan
There are a few exceptions, when a taxable benefit for a beneficial loan does not arise:
- The loan is used for certain ‘qualifying’ purposes by the director, such as buying an interest in a partnership
- The company charged the director interest (there are criteria surrounding this)
- The loan is deemed ‘small’, i.e. it remains under £10,000 throughout the tax year
P11D – the returns for benefits in kind
The company must report the beneficial loan on a P11D form; this is used to declare all employee benefits, such as company car use or private health insurance.
The director is now liable for tax on the interest that would have been due if it had been a normal loan on the open market. Tax is charged on the interest on the total amount overdrawn.
National Insurance contributions
The beneficial loan has, in effect, increased the director’s salary. This means that the company will need to pay National Insurance contributions (Class 1A) on the beneficial loan.
Filing a P11D(b) form
The company will need to complete and submit a P11D(b), summarising the individual P11D forms completed for employees and reflecting the company’s Class 1A National Insurance liability.
The P11D(b) is due to HMRC by 6th July each year and will need to include the overdrawn director’s loan account at the tax year-end, 5th April. (Note, this is not the company’s accounting year-end.) What this means is that, if your company’s year-end is not 31st March, you will need to draw up your books mid-year to complete your P11Ds if you have an overdrawn director’s loan account.
So, your P11D(b) for the tax year ending 5th April 2020 must be filed by 6Th July 2020. The deadline for paying any tax due to HMRC is 22nd July each year.
Late submission penalties
If your director’s loan account is overdrawn and you think it may exceed £10,000 at any point in the tax year, it is important to complete the P11D forms and P11D(b) on time. Late submissions are charged a penalty of £100 for each month or part month the return is overdue. You’ll also be charged penalties and interest if you pay HMRC late.
Ensure your director’s loan is cleared
As we have explained above, an overdrawn director’s loan account could result in a S455 charge or additional costs associated with benefits in kind – or both. Care should therefore be taken to ensure that your directors loan account is cleared.
Two key points to remember
- A S455 charge may be avoided by an election of a dividend after the year end. However, if the balance on the loan was over £10,000 at some point, then a benefit in kind would arise.
- A director’s loan remaining under £10,000 throughout the year but not repaid by the year end or within the nine months would result in a S455 charge being payable but no benefit in kind arising.
Need a hand?
The tax legislation around director’s loans can be complicated, and you need to ensure your compliance to avoid penalties from HMRC. If you’re unsure of your company’s tax obligations, then please get in touch – our team of experienced experts will be happy to help.
At Crunchers Edinburgh we offer traditional tax and compliance services, taking care of your business and personal tax affairs. We also complete a full tax review before your business’s accounting year-end.
As alternative accountants, our focus is on improving the numbers for your business and we can offer much more than a traditional accountant. With our industry knowledge and experience, our aim is always to add value to your business and to help you grow. If you’d like to find out how we could help you, take a look at all the services we offer or call us on 0131 502 0543 for a chat.
