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.

Corporation Tax

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

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