Directors Current Account (Overdrawn)

Introduction

• This is our approach to all articles.
• From time to time, the directors account with the Company can become overdrawn.
• Therefore, in those circumstances, there are a number of ways the account can be dealt with.
• Overdrawn Directors Current Accounts must be cleared, as given in the example below.
• Failing this one has to pay an extra Corporation Tax charge know as a Section 455 liability.
• There are various options on how to deal with this as follows:
  • Issuing Dividends for such amounts as may be necessary.
  • Paying additional Salary.
  • Paying the overdrawn account back.
  • Do nothing.
• The scenarios below are all based on existing legislation as of the article date:
  • one director.
  • in a single accounting period.
  • a debit balance (overdrawn) of £10,000.
• There are other considerations, for example interest on the overdrawn balance, that need to be taken into account.
• Please telephone Avar to discuss your particualr circumstances.

Dividend Option

• The dividend can be paid anytime in the financial year.
• There must be sufficient profits and reserves to issue the dividend.
• Consideration must be made if there are other shareholders as dividends will need to be paid in proportion to equity owned.
• The dividend will be subject to the individuals marginal rate of income tax (0% / 7.5% / 32.5% / 38.1%).
• For example purposes we assume a 7.5 % rate of tax.

Salary Option

• The Salary can be paid antime before the S455 liability is crystalised.
• The PAYE and National Insurance must also be paid to HMRC via RTI submission.
• Assumption is that a salary of £12,000 has already been paid.
• Corporation Tax relief on Salary and NI needs to be considered.

Do Nothing

• If no action is taken to clear the overdrawn account, a S455 charge is applied.
• This is 32.5% of overdrawn the balance at the year end.
• The S455 tax must be paid 9 months and 1 day after the financial year end.
• Even though this tax can be reclaimed from HMRC in the next period, it does not clear the overdrawn balance and so there will be the same problem in the next financial year.

Useful Link(s)

• Corporation Tax Penalties

Frequently Asked Questions