Borrowing money is often attached to a host of financial complexities, and there are various questions you should be asking before entering a loan agreement. For company directors, two common questions that may come up are: Can I borrow money from my company by taking out a director’s loan? And/or should I loan money to my company? When considering these options, you’ll need to understand the pay-back implications and understand potential tax liabilities.
Amy Crosby, Tax Director at HW Fisher, outlines what you need to know and recent changes to be aware of.
According to HMRC, a director’s loan is when you (or other close family members) get money from your company that is not:
If a director or shareholder takes a loan from a company, it may be subject to tax (a s455 CTA 2010 charge). The charge is calculated as part of the Corporation Tax return. When a loan is taken out and not repaid within 9 months of the year end the charge is applied.
The current rate of the charge has recently increased by 1.25%, from 32.5% to 33.75% (on loans created after the 6 April 2022).
Amy Crosby said: “Don’t forget that the tax charge is repayable once the loan has been repaid. There might be a few exceptions to s455 applying, such as if the individual works for the company but holds no material interest in it, however if you’re unsure, we would recommend discussing it with your accountant. It’s also worth noting that there might be employment tax implications if the company making the loan does not charge interest to the individual.”
Loans to the Company
If you are a director or shareholder and make a loan to a company there are tax consequences if the company pays interest on the loan.
For example, when an interest payment is made the company should withhold tax at the basic rate of income tax (currently 20%). The company should then notify HMRC that the interest payment has been made and pay over the withheld tax.
Amy adds: “Care needs to be taken when identifying when an interest payment has been made. HMRC can take a book entry to be a payment for these purposes.”
Please contact us if we can assist you with the preparation of a CT61 or if you are concerned that an interest payment may have been made without withholding the tax.