Overdrawn Loan Accounts

Overdrawn Loan Accounts

Directors’ loan accounts and Corporation Tax explained

Corporation Tax implications of overdrawn directors’ loan accounts

Whether your company has to tell HM Revenue & Customs (HMRC) that your director’s loan exists and pay tax on the outstanding loan amount – depends on when the loan is repaid.

Strictly speaking, this tax is not Corporation Tax. But in practice, you calculate the tax on your overdrawn loan on your Company Tax Return and add it to the Corporation Tax that’s due.

Your director’s loan account is paid off by the end of your company’s accounting period

If you pay off your director’s loan in full by the last day of your company’s Corporation Tax accounting period:

  • your company does not pay Corporation Tax on the loan
  • you don’t need to tell HMRC about the loan on your Company Tax Return

Your director’s loan account is paid off within nine months and one day of the end of your company’s accounting period

If your director’s loan account is overdrawn after the last day of your company’s Corporation Tax accounting period but you repay it in full within nine months:

  • your company does not pay any tax on the loan
  • you must include details of that loan in your Company Tax Return

Your director’s loan account is not paid off within nine months and one day of the company’s year-end

If your director’s loan account is not paid off in full within nine months after the end of your company’s accounting period:

  • You must include details of the loan in your Company Tax Return.
  • Your company must pay Corporation Tax on the loan – currently 32.5%.
  • HMRC will charge interest on the amount unpaid – interest runs from the normal payment date for the accounting period in which the loan was made, to the earlier of the date the tax is paid or the date the loan is repaid.

With income tax rates on the increase many directors are drawing funds from their loan accounts. This in turn creates problems with potential section 455 charges.