Director's Loan to defer higher-rate dividend tax

**cojak** · 30 December 2019, 07:30

Since you posted this at nearly 3am this morning, it appears that you are not in the UK.

Why should you worry about HMRC?

**JamesBrown11** · 30 December 2019, 09:28

When you work 70 hours/week you don't get to sleep much

**craigy1874** · 30 December 2019, 09:45

Originally posted by JamesBrown11 View Post

Hi,

I've searched for similar threads but all of them talk about overdrawn DLA. My case is a little different.

When my PSC had over £100k in retained profits (reserves) accumulated over the years, I've extracted £100k in a single year to invest. Investments proved very unsuccessful (due to crypto crash, brexit mess, etc...) and I essentially lost all that money.
I use FreeAgent and recently when checking reports, I have noticed £50k in Director's Loan Account (DLA). In other words, I owe the company £50k.

I've read some scary stories about overdrawn DLA and its dangers and I'm getting a little paranoid. Booked an appointment with accountants to clarify what the hell is going on, but till then they assured me it's nothing to worry about. For now I'm doing my own research.

Out of £100k extracted, £50k was classed as standard low salary plus basic-rate dividend (7.5%), and remaining £50k as Director's Loan.

1) I believe this was done to defer/postpone paying higher-rate dividend tax (32.5%) until the next tax year, where allowances and tax bands reset. In other words this DLA acts as a "buffer". Is that correct?

2) When £50k loan is due to be repaid in June 2020 with a paper dividend / journal entry, will that dividend add to my personal income in 20/21 tax year, and essentially max out instantly on available allowances/tax bands? Bear in mind no money would actually leave the company. Dividend would go straight into DLA.

3) If that's the case (allowances and bands maxed out), any additional money taken out in 20/21 tax year would straight away attract higher-rate dividend tax?

4) Do you recommend to live frugally out of my remaining savings (£10k) and refrain from taking out any more profits from the company in 20/21 until April 2021 when allowances/tax bands reset again?

Thank you in advance for any help.

1. Bit concerned if this was a single loan withdrawal and then 'classed as separate things' I never like that and always advise my clients against it. That being said, what is done is done. Looks like you have used your £50k BRB for 19/20 and the balance treated as a loan.

2. Yes, that is correct.

3. Yes, that is correct.

4. If that is possible then yes it is a good idea.

**WordIsBond** · 31 December 2019, 09:54

If you can really live that frugally (on £10K for a year?), that would be best.

I think you have to pay interest to your company on DLs over £10K, don't you? Better check into that.

If you reach the end of your £10K before the end of the 20/21 tax year, you could take another DL in the last half of the year, as long as it is more than a month after the last one is paid off. Live frugally and make it a small one (less than £10K) so you aren't repeating the same mess over and over again.

In future, remember that if you take a DL, it's a debt. You have to pay it back. Don't invest it in flaky stuff that you might lose all your money. If you want to go into risky investments, do it with your own money. Take a high dividend, pay the dividend tax due, and then you have the money and can play around with it however you want.

**JamesBrown11** · 31 December 2019, 22:20

Thank you guys for the advice. I will be speaking to accountants in the new year to clear up the details (how CT600A works, is 2.5% interest or advance Corp Tax due, etc).

This loan is another painful lesson that hopefully I (and others reading this) will learn from.

I can tell from all the scars on my face that whenever money is involved, the playing field is always a minefield. It's always full of traps you can easily fall into and lose money. Special cases, small print, hidden commissions/taxes, T&Cs, etc. Some (most?) of these traps deliberately placed so that someone can put their filthy hands on your money.
It's sad that you need to fall into these traps first before you learn from your mistakes. No matter how risk-averse and vigilant you are, eventually you will slip.

I'm not surprised that 90% of businesses fail in the first 5 years. I've seen an infographic saying number one reason for bankrupcy was Poor Tax Planning. In other words people operating as PSC lack knowledge to make good tax decisions. If every contractor knew from day1 how the tax system works in every detail, most of us would be successful and people would be more willing to become self-employed in the first place.

Have a great new year and may all your contracts in 2020 be outside @ 600/d with no bench time

Will update the thread as soon as I hear back from accountants or have further questions.

Director's Loan to defer higher-rate dividend tax