Many companies will require investment from the directors at some point, whether it’s for the initial start up costs, to fund a purchase of machinery or purely for working capital during difficult periods.
If this is the case, the good news is you are able to charge the company interest on any money you have paid in from personal funds that has yet to be repaid (your director’s loan account).
The rate of interest charged must be deemed to be a commercial or market rate. We have recently been applying up to 10% as we see this as being a reasonable rate that third party lenders would charge for an unsecured loan.
If you are on a director’s salary of around £738 a month, depending on your other income, you could earn around £9,700 in interest without paying any tax at all!
When paying the interest to the director, the company must deduct basic rate tax at 20% and pay this to HMRC, together with completing a CT61 form (don’t worry, we can take care of this for you).
The tax suffered on the interest is then accounted for when preparing the director/shareholder’s personal tax return at the end of the tax year, often resulting in a tax repayment.
Another positive is that the interest paid by the company is a tax deductible expense, consequently reducing the company’s Corporation Tax bill too. This will be even more beneficial with the upcoming increase in Corporation tax rates.
This, however, is providing the company doesn’t already have high cash balances not earmarked for particular bills or projects.
To formalise the interest charge, a brief loan agreement should also be drafted between the company and the director, confirming the interest rate to be charged.
So if you’ve been wondering, can I charge interest on my director’s loan account?
Get in touch with us and we can quantify the tax you could be saving by doing so.
The above is based on UK tax treatment only.