Avoid NICs on directors’ loans
JC writes: Sometimes my firm will arrange for payment of a large personal bill. This is charged to my director’s loan account, which is generally kept in credit. I have read that if a director’s loan account is overdrawn, this may make the payment liable to National Insurance. Is this correct, and can it be avoided?
There is a risk of getting caught for National Insurance contributions (NICs) on payments charged to a director’s loan account, writes Jon Sutcliffe, partner at Kingston Smith LLP. This is where HM Revenue & Customs (HMRC) believes the payment to be an advance on payroll earnings, which would otherwise be subject to NICs.
There is a general rule that, if your director’s loan account is kept in credit, the payment will not be liable to NICs. This is because you are drawing on your own (taxed) funds.
Where your account becomes overdrawn as a result of a payment, whether a NICs charge results depends on whether the payment is made in anticipation of earnings to be credited in the future. If it is, it is treated as a payment “of or on account of” earnings, and a NICs charge arises.
There is no liability for NICs on the overdrawn amount if the withdrawal is made in anticipation of an introduction of funds that are not earnings — for example, dividends, matured insurance policies or other personal income.
You say your director’s loan account is generally kept in credit. This might be enough to avoid the risk of being charged NICs, but it is worth making sure that you can demonstrate that your director’s loan account only ever goes overdrawn to the extent that you can anticipate an introduction of funds to your account.
If your loan account is more than £5,000 overdrawn, HMRC will also be interested in whether interest has been paid on the loan.