How to Clear an Overdrawn Director’s Loan Account
An overdrawn director’s loan account can potentially be cleared through repayment, dividends, salary, expense credits or other appropriate transactions — but the accounting and tax treatment needs to be reviewed carefully.
Accounting & Tax Associates Ltd helps company directors reconcile overdrawn loan accounts, review available repayment options and consider s455 Corporation Tax before the company’s accounts and tax return are finalised.
First Establish Exactly How Much the Director Owes
Before deciding how to clear an overdrawn director’s loan account, the accounting records should first be reconciled.
The balance may contain personal withdrawals, expenses paid by the company, payments made personally by the director, dividends, payroll credits or transactions that have been incorrectly coded.
Trying to clear an unreliable balance can create further accounting and tax problems.
Ways an Overdrawn Director’s Loan Account May Be Cleared
There is no single solution for every company. The appropriate treatment depends on available cash, distributable reserves, payroll, expenses and the director’s wider tax position.
Repay the Company in Cash
The most straightforward method is for the director to return money to the company.
ExampleIf the director owes £20,000 and transfers £20,000 into the company’s bank account, the loan account can potentially be reduced to nil.
Credit a Valid Dividend
A properly declared dividend may be credited to the director’s loan account rather than physically being paid to the director.
ImportantThe company needs sufficient distributable profits and the dividend should be legally valid and properly documented.
Credit Salary or Bonus
Remuneration may potentially be credited against the director’s loan account.
ImportantSalary or bonuses generally need to be processed through payroll with the appropriate PAYE and National Insurance treatment.
Credit Business Expenses
If the director personally paid legitimate company expenses that have not yet been recorded, those amounts may be credited to the director’s loan account.
ImportantThe expenditure should be genuine company expenditure and supported by appropriate records.
Combination of Methods
A director may potentially use more than one valid method to reduce an overdrawn balance.
ExamplePart of the loan could be repaid in cash, with another part cleared through a properly declared dividend.
Loan Release or Write-Off
A company may in some circumstances release or write off the amount owed.
ImportantThis can create separate Income Tax and National Insurance consequences and should not be treated as a simple accounting entry.
Repaying the Director’s Loan With Cash
Cash repayment is often the simplest transaction to understand: the director transfers money back to the company and the amount owed is reduced.
However, the timing of the repayment matters where an s455 Corporation Tax charge may otherwise arise.
The accounting records should clearly identify the repayment against the director’s loan account rather than treating the money as sales or other company income.
Rather than paying the dividend into the director’s personal bank account, a valid dividend can potentially be credited to the director’s loan account.
Can a Dividend Clear an Overdrawn Director’s Loan?
Potentially, yes — but only where a valid dividend can actually be declared.
A company generally needs sufficient distributable profits to support the dividend. The dividend should also be properly approved and documented.
The dividend can also have personal tax consequences for the shareholder, so clearing the company loan does not necessarily mean there is no tax cost.
Using Salary or a Bonus to Reduce the Loan
Salary or a bonus may potentially be credited against an amount owed by the director.
This is different from simply posting an accounting journal. Remuneration should be considered through the company’s payroll process and can create PAYE and National Insurance liabilities.
Explore Payroll Services →Directors often pay company costs personally, particularly during the early stages of a business.
Record Valid Business Expenses Owed to the Director
If a director has personally paid genuine business expenditure, the company may already owe money back to the director.
Recording those expenses correctly can therefore reduce an overdrawn director’s loan balance.
This should be based on genuine company expenditure rather than creating retrospective expenses simply to reduce the loan.
Why the Timing of Repayment Matters
HMRC considers whether a relevant close-company loan has been repaid within 9 months after the end of the Corporation Tax accounting period.
Even where the loan is repaid within the 9-month period, CT600A reporting can still be required if the loan was outstanding at the accounting period end. HMRC guidance confirms this reporting requirement.
Be Careful With Temporary Repayments
Repaying money shortly before the deadline and then withdrawing it again may not achieve the intended tax result.
HMRC has anti-avoidance provisions dealing with repayments followed by further borrowing and arrangements to re-borrow.
The substance and timing of the transactions should therefore be reviewed rather than looking only at whether the loan account briefly reached zero.
HMRC currently states that relevant loans made on or after 6 April 2022 can attract a 33.75% Corporation Tax charge where the applicable s455 conditions are met.
An Outstanding Balance Can Trigger s455 Corporation Tax
Where the relevant loan remains outstanding beyond the applicable period, the company can become liable for additional Corporation Tax under section 455.
This tax charge does not itself remove the debt. The director can still owe the money to the company.
Read the Full Director’s Loan Account Guide →Can the Company Reclaim s455 Tax?
Relief can generally become available where the relevant loan is subsequently repaid, released or written off.
HMRC currently states that repayment cannot be made to the company before the relief becomes due, which is generally 9 months and 1 day after the end of the accounting period in which the loan was repaid, released or written off.
HMRC also imposes time limits for making the repayment claim.
Before Choosing How to Clear the Loan
Continue Exploring Director’s Loan Account Issues
Clearing the Loan May Affect Several Areas of the Accounts
Director’s loans connect with bookkeeping, payroll, dividends, annual accounts and Corporation Tax.
Official Director’s Loan Resources
Clearing an Overdrawn Director’s Loan FAQs
What is the easiest way to clear an overdrawn director’s loan?
A direct cash repayment is usually the simplest conceptually, but the best approach depends on the company’s and director’s circumstances.
Can I use dividends to clear my director’s loan?
A properly declared dividend may potentially be credited against the loan where the company has sufficient distributable profits.
Can I use salary to clear the loan?
Salary or a bonus may potentially reduce the loan balance, but payroll, PAYE and National Insurance consequences need to be considered.
What if I repay the loan within 9 months?
Repayment within the relevant period can prevent an s455 charge becoming payable, subject to the detailed rules and any anti-avoidance provisions.
Can I repay the loan and take the money back out?
Care is required. HMRC has rules specifically dealing with repayments followed by further borrowing.
Does CT600A still need to be completed if I repay before 9 months?
Where the relevant loan was outstanding at the accounting period end, CT600A reporting can still be required even where repayment occurs within the following 9 months.
Can s455 tax be reclaimed later?
Relief may become available where the qualifying loan is later repaid, released or written off, subject to HMRC’s claim and timing rules.
Can business expenses reduce my director’s loan?
Genuine company expenditure personally paid by the director may be credited to the director’s loan account where properly evidenced and recorded.
Review the Numbers Before Choosing the Repayment Method
Tell us the amount outstanding, company year end and whether repayments, dividends or further withdrawals have already occurred.
Tell Us About the Overdrawn Balance
We can review the accounting records and assess the available options before the company year-end position is finalised.