Loaning Money To Your Company - What Are The Tax Benefits?
You may have thought about lending money to you company or having the company lend you some money to get through.
You can give loans to your company and withdraw them without any tax implications. Interest can also be charged as long as it is charged at the commercial rate.
The rate of commercial interest is around 5% to 15% for an unsecured loan and the interest paid by the company will be tax deductible.
If you are a close company (less than 5 shareholders) you need to be aware of the S455 tax charge. If you owe the company money at the end of the year, this will give rise to an additional tax charge payable by the company. This tax charge is the same rate as the additional rate for dividends.
The S455 tax charge is payable 9 months after your end of year and paid at the same times as your corporation tax. If you repay the loan to the company, you are able to reclaim the S455 tax you have paid (you have up to 4 years to reclaim).
This is quite a complicated area so we will discuss this in more detail in a separate blog.
Scenario 1
If you have extra funds available to lend to your company, you can charge commercial rate interest on the loan amount. This gives you tax free money by using the 'savings allowance' and the interest payments are tax deductible for the business.
The Savings Allowance applies to interest income and the amount of the allowance available depends on the level of taxable income:
Basic Rate - £1,000
Higher Rate - £500
Additional Rate - Nil
Scenario 2
If you have already lent money to your company, then you should be charging interest because:
- To take advantage of the Savings Allowance to receive up to £1,000 of interest income tax free
- It gives you additional protection for your loan
A loan to your company will be an unsecured loan and can be used to pay other creditors if your company has financial difficulties
Scenario 3
The company has funds to lend to your (or your employees)
If you give yourself a loan it will be tax free if it is under £10,000 and repaid within 9 months of your end of year (this applies to directors/shareholders).
The same also applies to your employees, if the loan is under £10,000. The employee will not pay any tax or National Insurance on that loan.
It is a good way to incentivise employees and a possible retention tool.
Extra's
If the loan is longer than 12 months, it will be considered as 'yearly interest' and you are required to withhold 20% of the interest payments and pay it to HMRC via a CT61 quarterly return.
If you keep the loan to under 12 months, generally withholding tax will not apply.
Making sure the loan is legally documented makes it a low risk method of extracting funds out of the company especially when it is under £10,000.
Frequently asked questions
This article has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the provided content.
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Written by the team at:
Saint Taxation
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