An overdrawn directors loan account is where a company loans money to the director. This is generally bad news from a tax angle and causes 2 problems which in summary are.

1. A benefit in kind charge is due on interest free loans in excess of £5,000.
2. A corporation tax charge of 25% of the amount of the loan is due if the loan is not repaid within 9 months of your accounting period end but is repayable 9 months after the end of the accounting period in which the loan is repaid.

It can often happen quite innocently when the director treats the company bank account as his own personal bank account, and whilst this shouldn't happen it often does in practice.

Assuming you don't have the funds to repay the overdrawn account, the traditional way of clearing an overdrawn directors loan account has often been to pay a dividend to clear it. This is generally a cheaper method than voting a salary bonus which would incur large national insurance costs. However, what if the company can't pay a dividend because it doesn't have enough retained profits or a dividend is not wanted because other shareholders would also benefit, this can cause problems.

One potential answer is to look to get the company to formally write off the loan account. The amount written off can then be treated just as if it were a dividend for tax purposes. It should be written off because of your position as a shareholder rather than as remuneration from your position as an employee to avoid the Taxman trying to suggest the write off is an emolument liable to NI. Expert advice as always is essential before trying this.

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