Lending to limited company - taxation
Discussion
Hey all,
Hoping you can help with a (hopefully) simple question on taxation when lending to a limited company.
Quick context: starting a company - have leant £23k into the company to get the business going. I'm a director. The shareholder agreement states that interest is calculated at BoE base rate+4%
Questions:
- I've been looking at this reference page (https://www.gov.uk/directors-loans/you-lend-your-company-money) - as alluded to here, does interest on the loan have to be paid back quarterly?
- The reference page states income tax on the interest must be paid by the company at 20%. Say the interest for one payment £10 gross. Minus 20% income tax paid by the company, you have £8 net paid to the lender (me). Do I then need to pay additional income tax on top of this based on my salary? (I'm in the 'higher rate' income tax bracket)
- As dividend tax is high at levels over £50k (the only time I would think about extracting a dividend), would it make sense to instead have a higher rate of interest on the loan to the company, and then extract money from here as £23k (tax-free) loan principal and 'only' 20% tax on the accrued interest? (This would only potentially work if interest does not have to be paid quarterly, and interest is high enough to make the amount worth extracting).
I appreciate these questions may be basic, but I'm struggling to work out how to get money out of this thing along with solving another million problems! Hence why I'm sending this out at 9pm on a Saturday night!
Cheers,
22s
Hoping you can help with a (hopefully) simple question on taxation when lending to a limited company.
Quick context: starting a company - have leant £23k into the company to get the business going. I'm a director. The shareholder agreement states that interest is calculated at BoE base rate+4%
Questions:
- I've been looking at this reference page (https://www.gov.uk/directors-loans/you-lend-your-company-money) - as alluded to here, does interest on the loan have to be paid back quarterly?
- The reference page states income tax on the interest must be paid by the company at 20%. Say the interest for one payment £10 gross. Minus 20% income tax paid by the company, you have £8 net paid to the lender (me). Do I then need to pay additional income tax on top of this based on my salary? (I'm in the 'higher rate' income tax bracket)
- As dividend tax is high at levels over £50k (the only time I would think about extracting a dividend), would it make sense to instead have a higher rate of interest on the loan to the company, and then extract money from here as £23k (tax-free) loan principal and 'only' 20% tax on the accrued interest? (This would only potentially work if interest does not have to be paid quarterly, and interest is high enough to make the amount worth extracting).
I appreciate these questions may be basic, but I'm struggling to work out how to get money out of this thing along with solving another million problems! Hence why I'm sending this out at 9pm on a Saturday night!
Cheers,
22s
I don't believe you have to pay it quarterly, just that you have to report any payment quarterly.
It throws an interesting question though, as a 'dividend tax' avoidance measure. Is there a maximum interest rate you can charge? Would the interest still be a legitimate business expense even if the Ltd didn't need the loan and it just sat in the bank?
It throws an interesting question though, as a 'dividend tax' avoidance measure. Is there a maximum interest rate you can charge? Would the interest still be a legitimate business expense even if the Ltd didn't need the loan and it just sat in the bank?
This is a very common situation.
When the company repays your loan capital, there is no tax deduction for the company and no tax for you - it is just returning the capital you have lent.
When the company pays interest to you - provided it is on commercial terms and incurred wholly and exclusively for the purposes of the business - the company gets a corporation tax deduction and you get taxable income. The company will be required to withhold 20% income tax from the payment to you and it pays this over to HMRC quarterly.
You declare the interest income in your self assessment return and claim credit for the income tax withheld. As a higher rate taxpayer you will have an additional 20% income tax to pay.
It should be borne in mind that the company does not get a tax deduction unless the interest is paid - not just accrued. The company must pay the interest within 12 months of the end of its accounting period to get the deduction - otherwise it gets the deduction in the accounting period of payment.
There is not necessarily an overall tax saving. Don't forget that the money you lend has already been taxed when you first earned it!
When the company repays your loan capital, there is no tax deduction for the company and no tax for you - it is just returning the capital you have lent.
When the company pays interest to you - provided it is on commercial terms and incurred wholly and exclusively for the purposes of the business - the company gets a corporation tax deduction and you get taxable income. The company will be required to withhold 20% income tax from the payment to you and it pays this over to HMRC quarterly.
You declare the interest income in your self assessment return and claim credit for the income tax withheld. As a higher rate taxpayer you will have an additional 20% income tax to pay.
It should be borne in mind that the company does not get a tax deduction unless the interest is paid - not just accrued. The company must pay the interest within 12 months of the end of its accounting period to get the deduction - otherwise it gets the deduction in the accounting period of payment.
There is not necessarily an overall tax saving. Don't forget that the money you lend has already been taxed when you first earned it!
TNJ said:
There is not necessarily an overall tax saving. Don't forget that the money you lend has already been taxed when you first earned it!
With the new dividend rules coming into force from April, there is a small tax saving to be made by charging the company a commercial rate of interest for the director's loans. Prior to the extra dividend tax this didn't make much sense to do.As to the correct rate of interest to charge, I would suggest asking your bank what they would charge for an unsecured loan and use that as the basis for the figure. This way if you are challenged by HMRC you have some evidence.
I would think somewhere around 10-15% would be reasonable depending upon the business but some people charge their business more I believe.
The first £5,000 of dividend income will be tax free - so you would theoretically start charging interest on a loan once you had extracted your £5,000 tax free dividend.
AND, with loan interest, the company will get Corporation Tax relief, which it doesn't with dividends.
AND, with loan interest, the company will get Corporation Tax relief, which it doesn't with dividends.
Edited by Eric Mc on Monday 7th March 08:55
EddieSteadyGo said:
I would think somewhere around 10-15% would be reasonable depending upon the business but some people charge their business more I believe.
That's broadly where I got to, but you have to seriously consider if it's worth the ball ache.Say there is £30,000 credit n the DLA, interest at 12% would be £3600. Net Dividend on that would be £2880. New Dividend tax on that would be £216.
Of course, if the DLA was £300,000 then definitely worthwhile but how many do have that level I wonder.
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