Directors Loans DLA

07 July 2016

A cheap and tax efficient loan from your personal company can be very useful if structured correctly, however there are a few pitfall that you need to be careful with.

The first thing you need to be aware of is that HMRC has a £10,000 limit on loans to employees (which includes directors).

A personal income tax charge will arise if your loan account is overdrawn above the £10,000 limit at any time during the tax year, even if it only for one day as HMRC would class this as a “Benefit in Kind”.

The charge would be the difference between the interest that would be payable at the official rate which is set at 3% currently and the interest actually paid. This charge would only arise if the rate of interest paid on the loan is less than the office rate.

Where a tax charge arises, class 1A NIC is also payable by the company and forms P11D and P11D(b) need to be completed and submitted to HMRC before the deadline of 6 July each year, you can read more about P11D’s here.

The second thing you would need to be aware of is that if the loan balance is still outstanding nine months and one day after the end of the accounting period in which the loan was made then a section 455 tax charge will apply. There is no de-minimus here.

Section 455 tax will be charged at 32.5% for loans taken out after the 6 April 2016, however the section 455 tax is repaid once the loan have been cleared but the repayment is not due until nine months and one day after the end of the accounting period in which the loan is repaid.

Section 455 tax can be avoided by the company paying a salary, bonus or declaring a dividend, however the dividend route is subject to profit available in the company.

It’s not always a good idea to just clear the loan depending on the amount of salary or dividends you have received from your personal company. It could be beneficial to pay the section 455 tax and perhaps clear the loan at a later date, either against the payments of salary or dividends, or when the director has sufficient funds to repay the loan.

It is possible for a director to borrow up to £10,000 for up to 21 months from their personal company without paying any tax, however careful planning and steps should be taken to avoid the pitfalls mentioned above.

For more information on Directors loan account (DLA), please contact us or get in touch today by calling 0203 039 3993.

 

 

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