Tax implications of writing off a director’s loan
Personal and family companies often make loans to directors, but these can have tax and National Insurance implications.
If the loan remains outstanding nine months and one day after the end of the accounting period in which it was made, a tax charge arises on the company. Tax charges may also arise if the loan is written off.
HMRC has contacted individuals who, between 6 April 2019 and 5 April 2023, received a director’s loan that was released or written off and may not have declared it as income on their Self Assessment tax return. Affected individuals can inform HMRC using the online disclosure service. Agents can make disclosures on their behalf.
For loans written off after 5 April 2023 and not declared, the tax return can be amended instead of using the disclosure service.
Tax Consequences
For the company: If section 455 tax was paid on the loan, the write-off is treated like a repayment, and the company can reclaim the section 455 tax nine months and one day after the end of the accounting period in which the loan was written off. The write-off must be declared on the supplementary pages of the company tax return.
For the director: The amount written off is treated as a distribution and taxed at dividend rates. It must be declared on the Self Assessment tax return. If the director is also an employee, the dividend treatment takes precedence, avoiding a double charge.
National Insurance Implications
If the loan is from employment, Class 1 NICs (employer and employee) will be due as the write-off counts as earnings.
If it is from shareholders’ funds and not linked to employment, no NICs apply — but this should be approved at a general meeting or by written resolution. HMRC may still challenge this.
Alternative Approach
Instead of writing off the loan, the company could pay a dividend (if there are sufficient retained profits) to clear the loan. The income tax result is the same, but no NICs apply to dividends, avoiding the National Insurance issue.
