Directors’ loan accounts are a financial tool that allows company directors and shareholders to borrow money from their company. They are often used to cover personal expenses, such as a down payment on a house or a new car. However, there are strict rules and tax implications governing directors’ loan accounts, and things can get complicated if the account becomes overdrawn.

In this article, we’ll break down overdrawn directors’ loan accounts. We’ll explain what they are, why they happen, and what the law says about them.

How to Properly Manage an Overdrawn Directors' Loan Account

What is an Overdrawn Directors’ Loan Account? (ODLA)?

An overdrawn directors’ loan account (ODLA) is a loan made by a limited company to one of its directors that has not yet been fully repaid. It is a common way for directors to draw money from their company, but it can also be a risky financial arrangement.

When a director takes out a loan from their company, the amount of the loan is recorded in the company’s accounts as a liability. This means that the company owes the director the money, and the director must eventually repay the loan.

What Does an Overdrawn Directors’ Loan Account Mean for My Business?

An ODLA can have a negative impact on a business’s financial position, as it represents a liability on the balance sheet. This can make it more difficult for the business to access other forms of financing, such as bank loans, and can also affect the company’s credit rating.

An ODLA can also create cash flow problems, making it difficult for the business to pay its bills and meet its financial obligations.

Additionally, if the loan is not repaid within the required time frame, the company will incur a corporation tax liability.

What Does an Overdrawn Directors’ Loan Account Mean for Me (a Director)?

As a director, an ODLA can represent a significant personal liability. This can put personal assets, such as a home or personal savings at risk. Additionally, if the loan is not repaid within the required time frame, the director may also be subject to income tax and national insurance implications.

It’s important for directors to be aware of the legal and financial implications of an ODLA and to ensure that it is managed and repaid properly to avoid personal liability. It’s also important to seek professional advice from an insolvency practitioner or accountant to ensure compliance with legal and financial requirements.

5 Things Directors Should Do to Manage Overdrawn Directors’ Loan Accounts (ODLA) Properly

  1. Review the loan regularly – A review of the ODLA is sensible to ensure that it is being used for legitimate business purposes and that it is being repaid on time (if the loan is being repaid via instalments).
  2. Keep accurate records – Keep accurate records of all transactions related to the ODLA, including the amount borrowed, the purpose of the loan and the repayment schedule, to ensure compliance with legal and tax requirements and to provide transparency to any other stakeholders.
  3. Understand the implications – Get familiar with the legal and financial/tax implications of an ODLA, including the potential for any personal tax liability on outstanding debt, as well as the impact on the company’s financial/tax position.
  4. Repay the company before the tax deadline – The company must have the ODLA repaid before the loan term reaches nine months’ after the company’s tax year-end. If you fail to meet this deadline, the company will incur additional corporation tax liabilities. 
  5. Seek professional advice – If you are concerned and believe that you may not be able to repay the ODLA, seek professional advice immediately from a licensed insolvency practitioner or accountant, to ensure compliance with the necessary legal and tax rules and to help you properly manage the ODLA.

What are the Tax Implications of an Overdrawn Directors’ Loan Account?

When it comes to the tax implications of an overdrawn directors’ loan, there are several factors to consider, such as the amount of the loan, the rate of interest paid, the terms of repayment and reclaiming corporation tax for the company.

The Amount

If the loan was more than £10,000, and you are both a shareholder and a director, your company must treat the loan as a “benefit in kind” and deduct National Insurance.

You must report the loan on a personal Self-Assessment tax return, so be sure to communicate this with your accountant.

Tax and the Rate of Interest

You may have to pay tax on the loan at the official rate of interest. If you paid interest below the official rate, your company must record the interest you paid as company income and treat the discounted interest as a “benefit in kind.”

You must also report the interest on a personal Self-Assessment tax return and may have to pay tax on the difference between the official rate and the rate you paid.

If you are uncertain about any of the above, please be sure to check with your accountant, or get in touch with us and we will be happy to explain this further.

Repayment and Reclaiming Corporation Tax

If the loan is repaid within 9 months of the end of the Corporation Tax accounting period, your company will use the amount owed at the end of the accounting period your company will pay Corporation Tax at 32.5% of the original loan.

If the loan is not repaid within 9 months of the end of the Corporation Tax accounting period, your company will pay Corporation Tax at 32.5% of the outstanding amount. Interest will be added to this Corporation Tax until it is paid or the loan is repaid.

If the loan is “written off” or “released” (not repaid), including if the company goes into liquidation, the company will deduct National Insurance through the payroll and you will pay Income Tax on the loan through a Self-Assessment tax return.

It is important to note that the company can reclaim the Corporation Tax it pays on a director’s loan that has been repaid, written off, or released, but you cannot reclaim any interest paid on the Corporation Tax. The claim must be made after the relief is due (9 months and 1 day after the end of the Corporation Tax accounting period when the loan was repaid, written off, or released), and within 4 years.

Can an Overdrawn Directors’ Loan Account be Written-Off?

In the case of a “close company,” defined as a limited company with fewer than five shareholders, a director’s loan may be written-off if the director is also a shareholder. In this situation, the loan would be treated as a distribution of profits.

If the director is not a shareholder, the outstanding amount will be taxed as employment income and must be included on the director’s personal tax return. This can result in a significant tax and National Insurance liability for the director.

In certain instances, a reduction of the overdrawn amount may be appropriate for legitimate reasons such as business mileage or company assets paid for with personal funds. However, it is important to note that such reductions can only be made in accordance with the insolvency laws and the guidance provided by the court or the official receiver.

It’s important to note that in a company liquidation, the liquidator has a legal duty to pursue every possible avenue to raise funds so that creditors can be repaid in part or in full. This means that even if a debt had previously been written off, the liquidator may still pursue the director for repayment of the overdrawn loan account.

It is essential to consult with a licensed insolvency practitioner to understand the options and implications of any decision involving an overdrawn director’s loan account and to ensure compliance with the law.

What are My Obligations as a Director with an Overdrawn Loan Account?

One of the key obligations for a director with an overdrawn loan account is to disclose the debt on any tax return. This includes the director’s personal tax return, as well as the company’s tax return.

The outstanding amount of the overdrawn loan will be taxed as employment income for the director and must be included in the “additional information” section of the tax return.

It is important to note that failure to disclose the overdrawn loan account on a tax return can result in penalties and fines.

Additionally, the director may be liable to pay National Insurance contributions on the amount of the overdrawn loan.

It’s also important to note that the company is also obligated to disclose the overdrawn directors loan account on its financial statements, as it is considered as a liability.

Try to consider the potential impact on the company’s liquidity and its creditors. In some cases, the company may not be able to pay the overdrawn loan and it may need to be written-off as part of the company’s financial restructuring, or insolvency process. This decision will ultimately be made by a licensed insolvency practitioner.

As a director, it’s essential to be aware of the obligations and responsibilities that come with an overdrawn loan account and to consult with experts as needed to ensure compliance with the law and to make informed decisions regarding the company’s financial health.

What if My Company Becomes Insolvent with an Overdrawn Directors’ Loan Account ?

When a company becomes insolvent, the priority is to pay off creditors and to try and rescue the company. In this situation, the overdrawn director’s loan account will be treated as an unsecured debt, and it will be ranked with other unsecured creditors in terms of priority of payment.

The appointed insolvency practitioner will review the financial situation of the company, including the director’s loan account, and will make a decision on how to deal with the debt.

Depending on the company’s financial situation, the overdrawn director’s loan account may be written-off completely or partially, or the company may enter into an arrangement to repay the debt over time.

Additionally, it’s important to note that when the company becomes insolvent, the director’s personal assets may be at risk if they are unable to repay the overdrawn loan account, and the company’s assets will be used to pay off the creditors, including the overdrawn directors loan account.

It is essential to consult with a licensed insolvency practitioner to understand the options and implications of any decision involving an overdrawn director’s loan account and to ensure compliance with the law when a company becomes insolvent.

Please feel free to contact us at your earliest convenience if this is appropriate.

What if I Need to Put the Company Into Liquidation with an Overdrawn Directors’ Loan Account?

If a company is unfortunate enough to be faced with entering liquidation, the liquidator (appointed insolvency practitioner) has a legal duty to pursue every possible avenue to raise funds so that creditors can be repaid in part or in full. This means that even if a debt had previously been written off, the liquidator may still pursue the director for repayment of the overdrawn loan account.