Q. My director’s loan account is overdrawn as we approach our year-end. Usually, a dividend is credited to cover the shortfall, but my accountant says that there are not enough reserves to do that this time. We’ve looked at writing off the loan to avoid an s.455 charge as a cheaper option than an additional salary payment. Are there any problems with this?
Writing off a director’s loan means that you will be taxed on the amount written off as if it were a dividend. On the face of it, this is cheaper than a salary payment. However, HMRC will usually argue that the write off is really a payment “derived from an employment“, meaning National Insurance also needs to be paid. The only way around this is to convince HMRC that the write-off arose due to your position as a shareholder. Expect a strong rebuff.
