Cash injection query

[Gordon R]

Simple question:

If I, as a director, were to come into a sum of money from time to time (eg. birthday money; a gift; something unrelated to the business) and paid it into the company's bank account, what would this be called/classified as? And what impact would it have with regards to taxability?

Cheers,
Gordon.

 

[Games4Business]

You are giving the company a loan and depends on whether or not the company is in profit.

 

[Gordon R]

Thanks. I suspected as much. And from what I've read on director's loans, as long it isn't above £5,000 then the company can pay it back without the director being taxed on it. Am I right?

 

[elaine@cheapaccounting]

Gordon

I think you may have got the wrong end of the stick on what you have read. The £5000 applies to loans to a director from the company.

If you lend the company money it is classed as a loan and would be paid back in accordance with whatever loan arrangement you may put in place that could also covers interest payments.

The loan itself is capital so you are not taxed on this but would be taxed on any interest you received – this would be income.

However as with everything do bear in mind that the directors must act in the best interests of the shareholders – e.g. specifying an unusual high interest rate might be questioned!!

Hope this helps.

 

[Gordon R]

It does, Elaine. But being the altruistic (and simplistic) types that we are, me and my fellow director would only ever be taking out what we put in, ie. we wouldn't be looking to receive any interest. From what you say, withdrawing money under this scenario wouldn't incur any tax at all. Yes?

 

[elaine@cheapaccounting]

yes

Think of it as you being a bank. The bank's profit is derived from the interest and charges they apply. The loan amount is capital. If you are not receiving interest then there is no income upon which to be taxed.

 

[Gordon R]

Thanks Elaine! Have a good day.

 

[Simonhatfield]

Just wondering?

As a shareholder and Director of a Ltd. Would there be any real tax advantage of charging interest?

My ltd is making a loss - about £5000 by the end of its first year (Nov)
I earn PAYE - £22000 and a partnership I am in earns me approx £15 000 profit.

I reckon I am just in the lower tax bracket.

I have around £6000 in the Directors Loan account I have put in at times to ease cash flow, should I add interest?

 

[DavidT]

I don't think there is any real benefit in interest. Often it is just notional interest for varying shares of capital introduced.

You might mean higher tax bracket with a £37K income. PAYE... unsure if you are talking before (gross) or after tax (net) on that.

Is it right... if you weren't taking £22K+(Tax/NIC?) from your Ltd Company it would be showing at least a £17K profit? Not looked closely at it, others might know quickly but there might be a better way to extract your earnings from that.

 

[Simonhatfield]

DavidT thanks for the info.

I guess it is possibly just to show a 'true' financial position had it borrowed the money from a conventional source (i.e a Bank) who would charge interest.

I think my first post might have been slightly misleading, my £22k is pre-tax but comes from an employer, my business' are just a sideline.

Simon

 

[Rienne]

Simon from a director's perspective I think you should charge interest. Your Ltd Co is a separate entity and you would earn interest if you put your loan capital in a bank, so why not from the company. The interest can always be added to the loan account and paid back when affordable, but it is an important (in my view) mind game to play with yourself that the company stands or falls on its own merits. I stand to be corrected by the accounting professionals here, but my perception is that once Ltd Co makes profits, then the interest it has paid on your loan would itself be charged against corporation tax anyway.

regards
Jeff

 

[Simonhatfield]

I understand where you are coming from, it means the accounts give a true picture of the state of the company 'on it's own feet'...

If I wanted to do this what interest rate should I charge? 9% more?

I don't understand where you mention the company would be charged Corp Tax on the interest, surely that would be an expense to the business, and an income for me personally to put on my Self Asses Tax Return?

Simon

 

[elaine@cheapaccounting]

I refer you to this, your duties as a director:

http://www.businesslink.gov.uk/bdot...RCES&itemId=1073791045&r.l2=1073859227&r.s=sc

See the part about not making personal profit at the company's expense.

Whilst you can charge what you like do consider this duty as well.

 

[Simonhatfield]

Surely, acting in the best interests in the company is making sure it is charged interest to show a true reflection of performance.

My question, having never borrowed money commercially is how much would be reasonable.

Simon

 

[Rienne]

Simon

You charge no more than the commercial rate that the company would be charged if it was borrowing in the market, but personally I think it a good idea to charge less than this to keep everything completely above board and not run foul of the rules which Elaine has rightly pointed out. After all it is your company.

The interest is an expense the company incurs, therefore should be charged against the company's tax liability. The interest which you personally get is charged to tax on your personal tax return.

I would stress this is the approach I would personally take but I always check with my accountant before doing things of this nature and strongly suggest you get your accountant's final advice on all this before proceeding.

Hope this helps
regards
Jeff

 

[DavidT]

I would have thought it likely that any interest on a loan would be fairly insignificant in the overall picture.

As the sole shareholder anyway, you are probably better not adding to the time spent on this... then paying higher personal tax on interest than you would just taking the bit of extra dividend.

 

[Simonhatfield]

Thanks DavidT that was my other though. I have about 3000 - 4000 in the Directors Loan account, I might mention it to my accountant and see if he rolls his eyes at the thought of working out the interest as the amount has varied throughout the year!