is it worth charging your company interest on directors loan?

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Karimbo

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    • Nov 5, 2011
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  • #1
    Hello.

    I am aware that I can charge interest on the money my company owes me. I read on accountants blog that it can be reasonable market rates so 10% interest could be charged if you wanted to.

    I'm just curious as to whether it makes financial sense to do so.

    Obviously saves on employers NI - I have 1 employee and the empoloyment allowance covers all employers NI. (both me and employee above Secondary Threshold)

    Based on what I've read it doesn't count towards the tax free £1000 interest allowance. The company has to pay the interest to director through RTI. So it's taxed just like paying the director wages. I am on 20% tax bracket

    Am I missing a perk?

    Is there a blanket 20% tax rare on the director's interest, so if the director is on 40% they get a lower amount of tax on the interest?
     
    WaveJumper

    WaveJumper

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  • #4
    From my understanding the company are going to deduct the income tax at source before paying you, I am no accountant (sure they will be along soon)

    Many factors are from my recollection going to come into play all depending on your own circumstances, ie if your not a higher rate tax payer and took for example £2k in interest that maybe better than taking a £2k divi, and of course the interest payment is an expense for the company. Personally I would talk to your own accountant as they should be aware of all your financial's etc. And i don't understand where the £1k savings interest free comes into play.

    @MyAccountantOnline should be able to give you a much better steer
     
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    Karimbo

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  • #8
    www.gov.uk

    Tax on savings interest

    You do not pay tax on your savings interest if you're on a low income.
    www.gov.uk www.gov.uk

    It woukd be taxed at source, bur if youre alliwed to hace it tax free you couod reclaim it.

    There is list of interest income that has persobal savings allowance. Ive xopypasted here. Not sure if dirextors loan counts as one of these

    Interest covered by your allowance​

    Your allowance applies to interest from:

    • bank and building society accounts
    • savings and credit union accounts
    • unit trusts, investment trusts and open-ended investment companies
    • peer-to-peer lending
    • trust funds
    • payment protection insurance (PPI)
    • government or company bonds
    • life annuity payments
    • some life insurance contracts
     
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    TheSkyisGray

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  • #9
    The company would have to deduct income tax at 20% and complete a CT61 quarterly. If you are a basic rate taxpayer then this would be a final tax, so less than additional salary or dividends but the loan would have to be significant to make it worthwhile. The interest does not qualify for the savings allowance.
     
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    DWS

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  • #10
    TheSkyisGray said:
    The company would have to deduct income tax at 20% and complete a CT61 quarterly. If you are a basic rate taxpayer then this would be a final tax, so less than additional salary or dividends but the loan would have to be significant to make it worthwhile. The interest does not qualify for the savings allowance.
    Click to expand...
    Is there a reason why it does not qualify for PSA?
     
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    Karimbo

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  • #11
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    DWS

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  • #14
    Karimbo said:
    seems like one of these areas where even accountants different. i've googled personal savings allowance and directors loan interest and come across two accountant's blogs that say it's claimable.

    to add a wrench into the works, someone suggestion it's not available for close companies
    Click to expand...
    I think that link sums it up with everyone agreeing in the end that it’s allowable for the PSA and so does the Rebecca Cave article.
    ITA2007 section 18 is what I read which makes no mention of it being excluded as far as I can see.
     
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    CazzieB

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  • #15
    Google it ct61 interest on directors loan
    If the Company pays interest on the director's loan, it must register with HMRC and file CT61 Returns, which require the Company to deduct 20% tax on the interest. The interest is then declared on the Directors personal tax return, but it could be tax-free if the interest is covered by the Personal Savings Allowance.

    Is interest received on directors loan taxable?

    The interest will only be tax-free if it falls within your allowances for that tax year, specifically your Personal Allowance, starting rate for savings, and Personal Savings Allowance. Your tax-band and income across all sources will factor in, so you could have to pay tax at 40% or 45% on this income.

    EXAMPLE​

    Let’s say a director lends her company £50,000 where the normal commercial interest rate for a loan of this size and risk is 2% per annum.

    The company would record £1,000 of interest in the annual accounts (£50,000 x 2%). This is a tax deductible expense, saving the company £190 (£1,000 x 19%). The director would record £1,000 of interest on her personal tax return. She would not pay any tax on this if she were a basic rate taxpayer and received no other interest in the personal tax year.

    In this example, this is a tax efficient way of extracting £1,000 from the company. Every situation will vary so it is important to discuss this with your accountant first.
     
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    Newchodge

    Newchodge

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  • #16
    Karimbo said:
    savings and credit union accounts
    Click to expand...
    Slightly off topic.

    I have savings in a credit union. They don't pay interest, they pay annual dividends, the amount of which is decided at the AGM. Should this go on my self assessment as dividends or savings interest?
     
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    Karimbo

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  • #19
    This is a scan of a CT61 form for anyone interested.

    I have redacted my company information. the form has specific information about your business and a payment slip with your company information on.

    So you need to request a CT61 FORM from hmrc. Here:
    There are notes on how to do the return here: https://assets.publishing.service.gov.uk/media/5a7e0a5ce5274a2e8ab4573c/ct61-notes-2010.pdf


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    Karimbo

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  • #20
    Can someone confirm rthis for me.

    Company pays director £1000 interest on DLA, deducts 20% and pays HMRC income tax on the interest. [£800 to director, £200 to hmrc]
    Company files the ct61 form.

    At the year end Director then reclaims the income tax paid on the interest as part of their £1000 interest free PSA when they file self assessment.

    Is this broadly correct?
     
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    Gettingthereslowly

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    Nov 14, 2019
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  • #24
    Hi Karimbo.

    Following you with interest.

    I'm not 100% sure of the maths for this either, but my large regional multi branch accountants think this is a viable route to take. To be honest, they have explained it to me twice now....but I still don't fully get it, and am afraid to ask for a third time!

    I'm trying it with £100k @ 10% pa interest for this yr.....if I remember to, I'll post back some of the workings/calcs.
     
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