Use a Directors Loan to push back tax - does this make sense?

[King James]

After running the business for 10 years and not earning much we finally started making a decent profit. I now have £500k in the business which I need to pay myself to buy a house (and pay stamp duty!). I will have a big tax bill to pay obviously if I paid this as a dividend this financial year - due Jan 2025. I was wondering does it make sense to take this as a Directors' Loan and then pay it back as a dividend after April (this would be within 9 months 1 day). That way I would have to pay the tax Jan 2026. This would give me more time to get it together also benefits of inflation eroding the cost of the tax. Risk would be if next year the tax rate went up again or they change the thresholds etc but that seems unlikely. Am I missing anything?

 

[ChrisCallaghan]

I'll leave the accountants on this forum to answer this in more detail, but I suspect you're not factoring in the tax on the directors loan into your equations...

Director's loans

Your and your company's responsibilities - repaying director's loans, interest, tax on loans, reporting to HM Revenue and Customs.

www.gov.uk

 

[King James]

Thanks Chris - my understanding is that there is no tax to pay unless you do not pay it back within 9 months 1 day of year end. There is interest of 2.25% mind you so if I got the loan today and paid back 5 April that would be £6k ish to pay personally ... although going back into the company. So I'd be paying £6k now (lets say £10k of taxed income) for advantage of deferring the tax bill by one year.

 

[DWS]

You also need to factor in that because the DL will be over 10k it becomes a BIK, why have you not taken money out of the Company before?
You need to sit down with your accountant and do some tax panning as 500k is a large amount if distributed incorrectly.

 

[King James]

Thanks @DWS I don't really have any choice at this point but to take the cash out in one go unfortunately.

My understanding is that the BIK means you have to pay it back within 9 months and pay interest. There's no actual tax. Seems there is an NI cost though for the company which I can't work out.

I'm going back now to thinking it's too much hassle and will just have to take as a dividend this financial year and get sh*fted on tax (albeit in Jan 2025).

 

[pentel]

With there being an election in the offing and with taxes generally only go in one direction it might make sense to take it out under the current tax allowances and rates.

 

[Lisa Thomas]

We are talking half a million here so I don't understand why you haven't talked about this with your personal accountant.

I believe you will have to declare the dividend/s income in your personal tax return/s and pay tax on it personally.

 

[MyAccountantOnline]

After running the business for 10 years and not earning much we finally started making a decent profit. I now have £500k in the business which I need to pay myself to buy a house (and pay stamp duty!). I will have a big tax bill to pay obviously if I paid this as a dividend this financial year - due Jan 2025. I was wondering does it make sense to take this as a Directors' Loan and then pay it back as a dividend after April (this would be within 9 months 1 day). That way I would have to pay the tax Jan 2026. This would give me more time to get it together also benefits of inflation eroding the cost of the tax. Risk would be if next year the tax rate went up again or they change the thresholds etc but that seems unlikely. Am I missing anything?

Such a shame you've not taken professional advice on this before and built up such a large sum in the business. You could certainly have taken some out previously tax free.

Don't overlook the Benefit in kind tax charge. Have a read here if you've not already done so https://www.gov.uk/directors-loans/you-owe-your-company-money

Before looking at directors loans I'd spend some time with an accountant looking at all ways possible to extract funds in the most tax efficient way based upon your personal circumstances. Spending a bit on professional fees will be money well spent.

 

[Bobbo]

Thanks @DWS I don't really have any choice at this point but to take the cash out in one go unfortunately.

My understanding is that the BIK means you have to pay it back within 9 months and pay interest. There's no actual tax. Seems there is an NI cost though for the company which I can't work out.

I'm going back now to thinking it's too much hassle and will just have to take as a dividend this financial year and get sh*fted on tax (albeit in Jan 2025).

There's multiple tax aspects here which I think you're conflating.

As a director/employee, if the company loans you more than £10,000 and you do not pay interest on it at at least the HMRC official rate you will have a benefit in kind of the difference between the interest at the official rate and any interest you do pay. The company will then pay Class 1A NIC on the BIK. You of course will pay tax personally on the BIK.

If you pay interest to the company of at least the official rate there is no BIK.

The 9 months rules is wholly separate. As a participator in the company, a loan from it to you may be caught by S455 meaning the company pays what is essentially a holding tax as part of its CT return.

 

[King James]

Thanks everyone. I would of course have taken some out earlier if I could but a) I didn't have it b) I was trying to stay within other thresholds for tax/ pension reasons on previous years.

I have had a few chats with accountant and a financial advisor but they didn't come up with much ... except to get a bigger mortgage instead of putting in cash which probably wouldn't make sense now anyway with rates as they are ...

Since I need the cash now I don't think there's really much I can do by the sounds of it except take a hit - I would have thought if there was some amazing scheme I would have heard of it or someone would share on this thread ... The only thing I could think to do was the Directors Loan vs the dividend but it doesn't seem worth the hassle ...

But if anyone does think there's a solution I'm all ears! thank you again for your help.

 

[WaveJumper]

Any reason why the company could not buy the house

 

[fisicx]

Since I need the cash now I don't think there's really much I can do by the sounds of it except take a hit...

...and lose 40% of it in personal tax. Which could mean you will only end up with £300k.

 

[DWS]

...and lose 40% of it in personal tax. Which could mean you will only end up with £300k.

And already paid C/Tax on that money!

 

[UK Contractor Accountant]

Since I need the cash now I don't think there's really much I can do by the sounds of it except take a hit

There maybe a way but means taking a breather for 2 years!

 

[numbersrule]

Hi King James
If you believe what Jeremy Hunt is saying is starting to happen with interest rates coming down, then would it make sense to look in more detail at your Accountant's suggestion of taking out a large perrsonal mortgage?

Your mortgage provider may view your company's healthy balance sheet as a reassuring security for a decent mortgage rate deal. You could fix the rate for one year at a time so that each year you gain from falling interest rates.

And, while all this is happening, your company could gradually pay you dividends in a tax efficient way.

You might think mortgage rates are expensive, but if you do the detailed financial analysis that your situation deserves then I suspect you'll be surprised at how much you could save with the mortgage option.

Remember, the additional tax rate of 45% applies to income exceeding £125,140, so the hit of £200k mentioned by fisicx may be an underestimate.

 

[numbersrule]

And King James, don't forget to factor in that Aldemore Business Bank is offering 3.25% interest easy access to set against your mortgage rate in the calculations,

The psychology of numbers is such that you sometimes have to try hard to bring yourself down to thinking smaller numbers.

A relatively sudden arrival of a large number can be psychologically distorting, so you need to take plenty of time over this decision. Don't allow the property deal to adversely influence a bad business decision.

 

[King James]

Thank you @Ground Investigator that's good advice. Unfortunately I dont think it would be possible to pay the dividends in a more efficient way over time as I would be above £100k + £125k thresholds anyway (hopefully) as live in high cost area / family etc. I drive a 2006 crap car so not living high life but would not give me much room to play with. Especially if they move the tax band down even further and (more than likely) don't move them with inflation ...

 

[NicoJ]

Remember, the additional tax rate of 45% applies to income exceeding £125,140, so the hit of £200k mentioned by fisicx may be an ununderestimate.

Just a slight correction in that dividends additional tax rate is 39.35% not 45%.

 

[Lisa Thomas]

There maybe a way but means taking a breather for 2 years!

Are you referring to an MVL?

 

[numbersrule]

Just a slight correction in that dividends additional tax rate is 39.35% not 45%.

Thanks NicoJ - of course!
Apologies @fisicx - you were nearer than I thought!

 

[UK Contractor Accountant]

Are you referring to an MVL?

yes but not phoenixing!

 

[Karimbo]

You can get £1000 without paying tax if you dont have much in savings.

Directors loan interest is treated like personal savings interest and you can get the first £1000 tax free.

is it worth charging your company interest on directors loan?

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...

www.ukbusinessforums.co.uk

edit: oops were talking about the wrong sort of directors loan.

 

[MyAccountantOnline]

You can get £1000 without paying tax if you dont have much in savings.

Directors loan interest is treated like personal savings interest and you can get the first £1000 tax free.

is it worth charging your company interest on directors loan?

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...

www.ukbusinessforums.co.uk

edit: oops were talking about the wrong sort of directors loan.

If you are a basic rate tax payer. It's £500 for higher rate payers.

 

[Byzantium]

You need to speak to your accountant and if they do not know, get a new accountant.

Your overarching philosophy is sound, it is just how to structure it that needs refinement.

 

[Dinky]

Hi King James
If you believe what Jeremy Hunt is saying is starting to happen with interest rates coming down, then would it make sense to look in more detail at your Accountant's suggestion of taking out a large perrsonal mortgage?

Your mortgage provider may view your company's healthy balance sheet as a reassuring security for a decent mortgage rate deal. You could fix the rate for one year at a time so that each year you gain from falling interest rates.

And, while all this is happening, your company could gradually pay you dividends in a tax efficient way.

You might think mortgage rates are expensive, but if you do the detailed financial analysis that your situation deserves then I suspect you'll be surprised at how much you could save with the mortgage option.

Remember, the additional tax rate of 45% applies to income exceeding £125,140, so the hit of £200k mentioned by fisicx may be an underestimate.

In my experience, unfortunately banks don't take into consideration a company's balance sheet when deciding a personal mortgage deal, only the directors salary plus dividends.

 

[Red Wood]

Leave the country for a bit is my advice... somewhere hot and sunny...

 

[Byzantium]

In my experience, unfortunately banks don't take into consideration a company's balance sheet when deciding a personal mortgage deal, only the directors salary plus dividends.

There are some who will look at retained earnings and director loan account, if in you favour.

I spoke about this with my old accountant a couple of years ago and he said that he had done it, so it was fairly tangible knowledge but I cannot remember who he mentioned, other than it was a mainstream lender, like Coventry etc. not an Aldermore type or more esoteric.

A decent financial advisor should know half a dozen of course and that is where I'd start.

 

[potato632]

Thank you @Ground Investigator that's good advice. Unfortunately I dont think it would be possible to pay the dividends in a more efficient way over time as I would be above £100k + £125k thresholds anyway (hopefully) as live in high cost area / family etc. I drive a 2006 crap car so not living high life but would not give me much room to play with. Especially if they move the tax band down even further and (more than likely) don't move them with inflation ...

Why are you driving a 2006 crap car if your company has £500k in the bank?

Talk to your accountant about leasing/financing/buying an EV through your company and pay BIK (benefit-in-kind) for personal use and now you have a cheap to run EV with good safety standards (much better than 2006!) for you and your family.

Depending on how much you drive you could be saving hundreds of ££ each month paying for electricity vs petrol/diesel. Not to mention insurance costs, maintenance and the safety aspect..

For example a £45k Nissan Ariya 87kWh is £33 per month BIK if you are 45% tax bracket

BIK used to be 0%, now it's 2% and will go up to 3%, 4% in future - still a great deal if you have the cash spare.

ev-database.org has a list of EVs and their BIK rates.

 

[N-UPS]

Draw it as Dividends and pay the tax.
Whinge for a while
Forget about it
Go to the library to get some value for your tax