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If you run a limited company, you may have a director\u2019s loan. You may also have discovered that the tax legislation covering director\u2019s loans can be complicated, so we\u2019re here to help.<\/p>\n
Heather Long, Crunchers Edinburgh\u2019s senior accountant<\/strong>, looks at your company\u2019s tax obligations when a balance remains outstanding on a director\u2019s loan account at the end of your financial year.<\/p>\n <\/p>\n As you might imagine, a director\u2019s loan account is a record of money<\/a> that you have taken out of the company. It is only used to record money that you haven\u2019t previously loaned to the business, and that isn\u2019t a salary, dividend or repayment of expenses.<\/p>\n <\/p>\n When a balance remains outstanding on a director\u2019s loan account at the company\u2019s year-end<\/a>, this can lead to a tax charge on the company called S455.<\/p>\n The loan account balance is calculated as 32.5% on whatever balance was outstanding on the director\u2019s 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<\/sup> March 2020, the tax must be paid by 1st<\/sup> January 2021.<\/p>\n An overdrawn director\u2019s 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<\/a> (HMRC), once the director repays the loan back to the company.<\/p>\n There is an exception to the rule \u2013 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\u2019s tax return.<\/p>\n <\/p>\n Further implication of an overdrawn director\u2019s loan account is that it can trigger a benefit in kind for the \u2018beneficial loan\u2019. This is triggered if the director\u2019s loan exceeds \u00a310,000 at any point in the tax year.<\/p>\n <\/p>\n There are a few exceptions, when a taxable benefit for a beneficial loan does not arise:<\/p>\n <\/p>\n 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.<\/p>\n 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.<\/p>\n <\/p>\n The beneficial loan has, in effect, increased the director\u2019s salary. This means that the company will need to pay National Insurance contributions (Class 1A) on the beneficial loan.<\/p>\n <\/p>\n The company will need to complete and submit a P11D(b), summarising the individual P11D forms completed for employees and reflecting the company\u2019s Class 1A National Insurance liability.<\/p>\n The P11D(b) is due to HMRC by 6th<\/sup> July each year and will need to include the overdrawn director’s loan account at the tax year-end, 5th<\/sup> April. (Note, this is not the company\u2019s accounting year-end.)\u00a0 What this means is that, if your company\u2019s 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\u2019s loan account.<\/p>\n So, your P11D(b) for the tax year ending 5th<\/sup> April 2020 must be filed by 6Th<\/sup> July 2020. The deadline for paying any tax due to HMRC is 22nd<\/sup> July each year.<\/p>\n <\/p>\n If your director\u2019s loan account is overdrawn and you think it may exceed \u00a310,000 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 \u00a3100 for each month or part month the return is overdue. You\u2019ll also be charged penalties and interest if you pay HMRC late.<\/p>\n <\/p>\n As we have explained above, an overdrawn director\u2019s loan account could result in a S455 charge or additional costs associated with benefits in kind \u2013 or both. Care should therefore be taken to ensure that your directors loan account is cleared.<\/p>\n <\/p>\n The tax legislation around director\u2019s loans can be complicated, and you need to ensure your compliance to avoid penalties from HMRC. If you\u2019re unsure of your company\u2019s tax obligations, then please get in touch<\/a> \u2013 our team of experienced experts will be happy to help.<\/p>\n At Crunchers Edinburgh<\/a> 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\u2019s accounting year-end.<\/p>\n 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\u2019d like to find out how we could help you, take a look at all the services we offer<\/a> or call us on 0131 502 0543 for a chat.<\/p>\n","protected":false},"excerpt":{"rendered":"What is a director\u2019s loan account?<\/h2>\n
S455 Corporation tax charge<\/h2>\n
Beneficial loan and benefit in kind<\/h2>\n
Exceptions to taxable benefit for a beneficial loan<\/h2>\n
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P11D – the returns for benefits in kind<\/h3>\n
National Insurance contributions<\/h3>\n
Filing a P11D(b) form<\/h3>\n
Late submission penalties<\/h2>\n
Ensure your director\u2019s loan is cleared<\/h2>\n
Two key points to remember<\/h3>\n
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Need a hand?<\/h2>\n