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HMRC internal manual

National Insurance Manual

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Class 1A National Insurance contributions: Special Class 1A NICs cases: Beneficial loans: Directors’ loan accounts: Overdrawn loan accounts: Example

NIM16678 explains on what amounts Class 1A NICs are due where a loan account is used and is overdrawn, i.e. the director owes the company money. Below the example illustrates an overdrawn loan account and the Class 1A NICs liability.

Example

Director makes a short term loan of £30,000 to the to the company on 1/2/06, so the company owes him £30,000.  His loan account is in credit to the tune of £30,000. 

Throughout the course of the period 6/4/06 to 5/4/07 the director draws a total of £40,000 from the company.

On 10/8/07 a dividend of £20,000 is voted to the director and this is paid by way of crediting the director’s loan account.

The company accounts for all of these transactions through the director’s loan account and a single balance is reflected in the company’s accounts to recoup the loan made to the company and on account of dividends he expects to be paid later in the year. Details below. (Sometimes a director or employee may have both credit and debit balances with a company. See EIM26198 for guidance about when balances can be netted off).

Date Description Money in Money out Balance
         
1/2/06 Loan made to company 30,000   30,000
6/4/06 Withdrawal by director   5,000 25,000
10/6/06 Withdrawal by director   5,000 20,000
5/7/06 Withdrawal by director   10,000 10,000
16/9/06 Withdrawal by director   5,000 5,000
1/2/07 Withdrawal by director   5,000  
3/3/07 Withdrawal by director   10,000 -10,000
10/8/07 Share dividends 20,000   10,000

In this example, the director owed the company £10,000 during the period starting 3 March 2007 and ending 9 August 2007.

Assuming the director was not required to pay any interest, Class 1A NICs are due on the general earnings chargeable to income tax under the beneficial loan legislation in ITEPA 2003 because the account was overdrawn from 3 March to 5 April 2007 and from 6 April 2007 to 9 August 2007. The Class 1A NICs will be due to be paid by

* 19 July 2007 (or 22 July if payment is made by an electronically approved method) for the period the account was overdrawn in the 2006/07 tax year; and
* 19 July 2008 (or 22 July if payment is made by an electronically approved method) for the period the account was overdrawn in the 2007/08 tax year. 

Even if the director was required to pay interest for the period during which the loan account was overdrawn, it can only be taken into account for the purpose of reducing or removing any Class 1A NIC liability, if the interest was actually paid by the date when the Class 1A NICs were due to be paid toHMRC.

For example, for the 2007/08 tax year, the director would need to pay the interest by 19 July 2008 (or 22 July if payment is made by an electronically approved method) to affect the Class 1A NICs liability. If by the relevant date (19 or 22 July 2008, depending on method of payment), the director had not paid any interest , then Class 1A NICs will be due on the general earnings chargeable to income tax under the beneficial loan legislation in ITEPA 2003. The Class 1A liability remains unchanged even if the director pays the interest at a later date. For example, if the director pays the interest on 1 December 2008, it will make no difference to the Class 1A NIC liability that stood at 19 or 22 July 2008.

See EIM26257 for guidance on the tax treatment of interest paid late.