Coverting Director's Loan to Salary(PAYE)

[ReginaldK]

Hi,

As a director I took out an emergency £25,000 pounds loan from my company in 2005. I regret doing this as I have to pay 419 tax on it every year when I submit my Corporation Tax return.

I have now reduced the director's loan account to £15,500. Can this loan amount be converted to PAYE Salary in my 2009 accounts? So then all I need to pay is the PAYE on it and I never have to deal with it again.

Is this feasible and is it legal?
How would I write that down in terms of book-keeping and End of Year Accounts?

Thanks in Advance and Kind Regards,

RK.

 

[MyAccountantOnline]

Yes you can repay the loan at any time by simply paying a salary sufficient to do so but your company will of course pay tax and NI on it.

Dividends might be another better option, but whether these can be paid depends on profits etc.

 

[Blackberry]

Hmmm

you shouldn't pay s491 tax on the overdrawn directors loan every year, you only pay it in the period in which it relates unless it is repaid within 9 months of it being taken. e.g. for your £25k loan if this then rises to £30k the following year you dont pay S491 tax on the £30k but on the additional £5k - the tax has already been paid on the £25k element. The S491 tax is paid once only on any one amount.

Once the overdrawn directors loan account is repaid then you can reclaim the S491 tax that has been paid on it. if you have reduced your loan to £15k you may be able to reclaim some of the tax paid on it already.

Assuming your company is profit making? you can easily repay the whole loan by paying a dividend through the loan account - i.e. instead of actually physically paying money out on a dividend you simply credit it to the loan account. This of course assumes that you are a shareholder as well as adirector.

In terms of salary and dividends you should come up with a very tax efficient way of getting money out of the company and into your back pocket.

If you have an accountant I'm surprised they havent dealt with these issues or explained them to you!

If you havent got an accountant now might be a good time to get one!

 

[Alison Jones]

HI

Was I being lied to at a Limited Company course I went to run by a staff member of the local Inland Revenue, he told us on the course that it was against the law to have an overdrawn Directors Loan account balance. Maybe nothing he told us had any actual truth as he tried telling everyone that it was against their rules to have a dividend/salary split and that they should all run payroll systems instead, I told the rest of the people who were on the course that was rubbish and that I was a bookkeeper and all my clients had been told by their accountants to have dividend/salary splits, the Inland Revenue member of staff did not like that and quickly changed the subject.

Can an accountant confirm whether overdrawn director's loans are allowed so I know for future use.

Thanks

Alison

 

[taxattack]

HI

Was I being lied to at a Limited Company course I went to run by a staff member of the local Inland Revenue, he told us on the course that it was against the law to have an overdrawn Directors Loan account balance. Maybe nothing he told us had any actual truth as he tried telling everyone that it was against their rules to have a dividend/salary split and that they should all run payroll systems instead, I told the rest of the people who were on the course that was rubbish and that I was a bookkeeper and all my clients had been told by their accountants to have dividend/salary splits, the Inland Revenue member of staff did not like that and quickly changed the subject.

Can an accountant confirm whether overdrawn director's loans are allowed so I know for future use.

Thanks

Alison

S197 Companies Act 2006 states that a loan to a director requires the approval of shareholders, but there is no blanket prohibition. The HMRC person may have had in mind S330 of the old Companies Act 1985, which prohibited loans to directors, although S334 permitted loans up to £5,000, and there were other exceptions as well.

Chris