Tax Focus - Interest on Directors Loans
Most Company Directors have put money into their company and some are owed significant sums. We explore the opportunity of tax free income from interest charged to the company for those in this position.
The Basics
The core proposition is that the Company Director charges interest on the money they have loaned to the company. The company now has a tax deductible expense for Corporation Tax and the Director has some interest income. Since there is a £1k Personal Savings Allowance and for people whose income is under £17,570 a further £5k of tax free interest income is available, the Director has now got some tax free income.
How Much Interest Can I Charge?
There is no rule about how much interest can be charge, but interest charged that is above a reasonable commercial rate will be viewed as a benefit in kind and taxed under P11d. An interest rate of 10% - 20% would be in line with most commercial lending.
What do I have to do?
Something to be aware of is that HMRC require that interest paid by companies must be taxed at source. Currently the tax rate applied is 20%. A form called a CT61 must be completed and submitted to HMRC, the tax is then paid to HMRC.
At the time of completing Self Assessment, the Director will then declare the interest income and tax paid at source. The tax paid at source will be more than the tax due and a credit will be applied to the tax liability.
Are there any downsides?
As you may have spotted, there is a cash flow issue. First the tax paid on interest must be paid to HMRC and only at a later date is a benefit felt, when the Self Assessment is submitted.
There is obviously the admin involved in completing and submitting the CT61 and often is considered complicated enough to require the involvement of professional services which comes with a cost.
Is it worth it?
At Co- our rule of thumb is that if a Director is owed more than £10k by their company it becomes a worthwhile exercise considering the tax savings, the time hassle and our fees.
