We do not have many company clients with overdrawn DLA's. However when we do, the accounts include an interest charge on the monies borrowed which we advise the director/s must be paid from their own funds to the company. This situation avoids the P11D, but we are conscious this is possibly not the best approach in terms of the directors having to pay the interest in full and the company being taxed on the interest. Would the P11D route be better in terms of the BIK being taxed on the directors at 20%/40% as opposed to paying all the interest. The company then gets a deduction for the class 1a charge. The main problem we face is having the accurate accounting records in time for the P11D.
How do other readers approach this?
Replies (4)
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Pay the interest.
Let us say that the company has pre-tax profits of £1,000, that the benefit charge will be £500, and that the director is a basic rate taxpayer. We are going to take all the post-tax profits as a dividend.
Now we can pay the interest, which means that the company has taxable profits of £1,500. It pays tax of £300, leaving it with £1,200, which it distributes as a dividend. £500 of the dividend has already been used to pay the company the interest, which means that Joe (let us call the director Joe) has £700 in his pocket, and no further tax to pay.
Or the company can pay £69 Class 1A, leaving it with taxable profits of £931. It pays tax of £186, leaving it with £745 to pay to Joe as a dividend. Out of his £745 dividend, Joe has tax of £100 to pay on his interest benefit, leaving him with £645.
Which is better? Try it with Joe being a higher or additional rate taxpayer and the answer will be the same.
Lengthy debate about what paying the interest involves now follows with John Grogan arguing that debiting interest to the loan account is payment of the interest.
Agree with Portia, unless the DLA is < £10k, in which case no BIK, so you can ignore it for personal tax/C1A purposes.