Director loans – tax implications
Lending money to your company
If you lend money to your company, the tax effects are as follows:
– Your company will not pay corporation tax on the money you lend it.
– If your company pays you interest on the loan, it will need to deduct income tax at 20% from the interest it pays you, and remit the tax deducted on a quarterly basis to HMRC. You will need to declare the interest received on your tax return. Your company can deduct the gross interest paid as a business expense.
Borrowing money from your company
If you borrow money from your company, the tax consequences are more complex. The following notes copied from HMRC’s website cover the basics, but if you are considering this course of action you should seek professional advice before withdrawing funds.
If the loan was more than £10,000
If you’re a shareholder and director and you owe your company more than £10,000 at any time in the year, your company must:
– treat the loan as a ‘benefit in kind’
– deduct Class 1 National Insurance
You must report the loan on your personal Self-Assessment tax return. You may have to pay tax on the loan at the official rate of interest.
If you paid interest below the official rate
If you’re a shareholder and director, your company must:
– record interest you pay below the official rate as company income
– treat the discounted interest as a ‘benefit in kind’
You must report the interest on your personal Self-Assessment tax return. You may have to pay tax on the difference between the official rate and the rate you paid.
If your overdrawn loan account has not been repaid nine months and one day after the end of your accounting period, your company will have an additional corporation tax bill to pay.
When the loan is subsequently cleared, your company can reclaim the additional Corporation Tax it has paid. You can’t reclaim any interest paid on the Corporation Tax.
Posted by Cassey Nixon on
3rd December 2018
Protecting yourself from an HMRC investigation
A tax investigation is stressful, time consuming and usually very expensive. And it could easily happen to you. HMRC’s investigations are more focused than ever before. During the tax year 2017-18, the tax man collected over £30 billion through ‘compliance activity’. Special investigators are using high tech methods to gain information and maximise tax revenues. […]
Loss Buying Restrictions
Under qualifying circumstances, Corporation Tax relief is available where your company makes a trading loss. The trading loss can be used by offsetting the loss against other gains or profits of your business in the same or previous accounting period. The loss can also be set against future qualifying trading income. However, there are restrictions […]