We are aware that HM Revenue & Customs (HMRC) are presently writing to individuals where they are aware of an overdrawn director’s loan in existence. HMRC are wanting to make sure compliance obligations are being met and any taxes due are collected.
If you are a company director in the UK, it’s not uncommon to take money out of the company in the form of a director’s loan (DLA). However, when the balance of this loan exceeds £10,000 at any point during a tax year, it triggers additional tax and reporting obligations, most notably the need to report a benefit in kind on a P11D form.
What is a Director’s Loan?
A director’s loan occurs when you, as a director or shareholder, borrow money from your company that is not:
- A salary or dividend
- A reimbursement of expenses
- Money you’ve previously loaned to the company
Why does the £10,000 threshold matter?
When your DLA exceeds £10,000 at any point during the tax year, HMRC considers this a beneficial loan, meaning you’re receiving a benefit from your company (an interest-free or low-interest loan) that would not be available to all employees.
This brings two consequences:
- You (the director) may have to pay Income Tax on the deemed interest.
- The company must submit a P11D form and may have to pay Class 1A National Insurance Contributions (NICs).
How do I calculate the benefit?
If the loan exceeds £10,000, HMRC expects you to calculate the interest that should have been charged, using HMRC’s official interest rate (currently 2.25% as of 2024–25).
Example:
If you borrowed £12,000 interest-free for a full year:
- Benefit = £12,000 × 2.25% = £270
- This £270 is reported as a benefit in kind on your P11D
How do I avoid the P11D requirement?
To avoid having to file a P11D for a director’s loan, you could:
- Ensure the loan never exceeds £10,000 at any time.
- Repay the loan before the company year-end.
- Charge yourself interest at or above HMRC’s official rate (this offsets the benefit). This is a common mechanism that is used as it negates the charge.
How to tackle other issues
An overdrawn loan to a participator (shareholder and therefore commonly directors) can have Corporation Tax consequences too and there are complex rules around their treatment to make sure a company does not fall foul of an additional Corporation Tax charge
If this is relevant to you or you have any concerns, you must navigate through the compliance and find the best mechanisms to use to mitigate any tax consequences. There are many ethical tax reliefs we process on behalf of our clients which we can potentially offer advice to mitigate your tax position at a free advice clinic.
You can contact Rob Case or James Geary on 01242 776000 or email Tax@randall-payne.co.uk if you want to discuss your tax situation in more detail.
