Directors Loan interest, but no personal income

Discussion in 'Accounts & Finance' started by k3n7, Aug 4, 2019.

  1. k3n7

    k3n7 UKBF Contributor Free Member

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    How does the interest paid by the company to the director for money the director has loaned the business work? (Directors Loan Account)

    I have funded the company via a directors loan, and understand I should charge the company interest on that money.

    However, the company isn't making money yet, and isn't expected to break even and have positive cashflow for upto 5 years (latest forecast) . Is it acceptable that I'm loan more money to the company so that it is funds to pay me the interest due?

    Secondly, I have no income at the moment. Nothing from the business or elsewhere. Provided the interest paid to me is less than the personal tax free threshold, am I exempt from tax on the interest received?

    If so, how does this tax free on interest received works as I am understanding the business must pay HMRC the basic rate on the interest first before it pays on the directors loan.
     
    Posted: Aug 4, 2019 By: k3n7 Member since: Jul 26, 2018
    #1
  2. UK Contractor Accountant

    UK Contractor Accountant UKBF Big Shot Full Member - Verified Business

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    Is there specific reason you want interest on your loan advance? It can be an interest free loan.

    Much easier just to charge the company a salary for your involvement as a Director/employee.
     
    Posted: Aug 4, 2019 By: UK Contractor Accountant Member since: Sep 18, 2013
    #2
  3. Mr D

    Mr D UKBF Legend Free Member

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    Most of us find it easier to not charge interest.
     
    Posted: Aug 4, 2019 By: Mr D Member since: Feb 12, 2017
    #3
  4. k3n7

    k3n7 UKBF Contributor Free Member

    44 3
    My thoughts are interest charges would be just losses to off-set against future profits.

    For a salary, I thought there would be payrole and national insurance etc to manage. Furthermore, it is not really justified as the business is not doing anything except holding investments waiting to mature
     
    Posted: Aug 4, 2019 By: k3n7 Member since: Jul 26, 2018
    #4
  5. k3n7

    k3n7 UKBF Contributor Free Member

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    What are the complications and issues to consider if paying interest?
     
    Posted: Aug 4, 2019 By: k3n7 Member since: Jul 26, 2018
    #5
  6. UK Contractor Accountant

    UK Contractor Accountant UKBF Big Shot Full Member - Verified Business

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    not if you pay under the NI limit of £118 per week. No payroll required.

    You are a Director of the company? you are allowed to charge a salary for services as a Director for the year. £5K a year is not unreasonable!
     
    Posted: Aug 4, 2019 By: UK Contractor Accountant Member since: Sep 18, 2013
    #6
  7. k3n7

    k3n7 UKBF Contributor Free Member

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    Any recommendations where I can read up on the requirements from a tax and accounting view point for salary under the 118 a week?
     
    Posted: Aug 5, 2019 By: k3n7 Member since: Jul 26, 2018
    #7
  8. Scalloway

    Scalloway UKBF Legend Free Member

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    Posted: Aug 5, 2019 By: Scalloway Member since: Jun 6, 2010
    #8
  9. SteLacca

    SteLacca UKBF Ace Free Member

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    Don't forget that if the company pays you interest the company needs to deduct basic rate tax, and account for that to HMRC and file form CT61.
     
    Posted: Aug 5, 2019 By: SteLacca Member since: Jun 16, 2016
    #9
  10. Newchodge

    Newchodge UKBF Big Shot Free Member

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    If you pay more than £118 per week you have to run payroll and file returns with HMRC every payday. However, if you pay more than that, but less than £166 you have to run payroll, you get credits towards your eventual state pension and there is no tax or NI to pay, provided you don't have other yaxable income.

    You have to register with HMRC as an employer, and you can also register to run payroll once per year, so there is very little admin.

    The advantage is that you offset all your salary against the company profits, even though you don't actually take the cash but let it acrue in the Director's Loan Account.
     
    Posted: Aug 5, 2019 By: Newchodge Member since: Nov 8, 2012
    #10
  11. SteLacca

    SteLacca UKBF Ace Free Member

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    OP states that there is no money coming out of the company yet.
     
    Posted: Aug 5, 2019 By: SteLacca Member since: Jun 16, 2016
    #11
  12. k3n7

    k3n7 UKBF Contributor Free Member

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    Is this still the case even if I'm not an income tax payer, as I have no real other income/minimal income
     
    Posted: Aug 5, 2019 By: k3n7 Member since: Jul 26, 2018
    #12
  13. SteLacca

    SteLacca UKBF Ace Free Member

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    Yes. Only banks and financial institutions can pay interest gross. Where it's paid by your company, the company withholds tax, and you claim it back personally.
     
    Posted: Aug 5, 2019 By: SteLacca Member since: Jun 16, 2016
    #13
  14. k3n7

    k3n7 UKBF Contributor Free Member

    44 3
    Thanks,
    I guess that's the reason why most do not charge interest, and a salary is preferred instead?
     
    Posted: Aug 7, 2019 By: k3n7 Member since: Jul 26, 2018
    #14
  15. k3n7

    k3n7 UKBF Contributor Free Member

    44 3
    Is this 118 per week the total salary the company pays?
    If there were two directors, both paid 118 a week, is pay roll needed?
     
    Posted: Aug 12, 2019 By: k3n7 Member since: Jul 26, 2018
    #15
  16. SteLacca

    SteLacca UKBF Ace Free Member

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    Posted: Aug 12, 2019 By: SteLacca Member since: Jun 16, 2016
    #16