Are you a company director contemplating a loan from your own business? If yes, it's crucial to understand the workings behind the Director's Loan Account (DLA) and the implications of an overdrawn director’s loan account (ODLA).
Director’s Loan Account
A DLA is an account maintained by the company that records all transactions between the company and the director that are not salary or dividends. This could include money lent to the company, expenses paid on behalf of the company, or any personal expenses paid for by the company. In some cases, directors may take a loan from their company via this account, which leads to an Overdrawn Director’s Loan Account (ODLA).
Overdrawn Director’s Loan Account
An ODLA occurs when a director borrows money from the company through the DLA, and the borrowed amount is not fully repaid. This condition brings several implications for both you as a director and the company.
For the director, if the ODLA exceeds £10,000 and is interest-free, there could be personal tax charges at the higher rate of tax, currently standing at 45 per cent. Directors or shareholders with outstanding debt over £10,000 must consider the loan as a benefit in kind (BIK), leading to Class 1 National Insurance deductions and requiring the inclusion of the loan on a personal Self-Assessment tax return.
From the corporate perspective, if the loan remains unpaid nine months after the company's year-end, a repayable Corporation Tax charge may be levied under Section 455 of the Corporation Tax Act. This charge is set at 32.5 per cent of the outstanding amount, and interest will be added while the loan is unpaid. This can be settled either through cash or by declaring dividends, provided there are sufficient profits and/or reserves. Note, however, that any interest paid on the Corporation Tax is not reclaimable.
Insolvency
In the case of insolvency, an ODLA can compound financial difficulties. An overdrawn DLA during insolvency implies the company lacks the necessary funds to settle the debt completely. This could be due to the company operating while insolvent or if the outstanding debt surpasses the company's assets.
The key to preventing an ODLA lies in ensuring full and timely repayment of the loan and mitigating the associated risks. Even though the financial challenges associated with an ODLA might seem overwhelming, with expert advice and support, you can navigate the issue and set your company back on its path to success.
Are you dealing with an overdrawn director’s loan account and seeking advice? Feel free to contact us today.