It’s not unusual for company owners or directors to spend company money on themselves and then pay it back later. But what are the tax consequences of this? And what happens if you want to borrow more substantial sums from the company over a longer period of time?
If you owe money to your limited company (sometimes referred to as an overdrawn director’s loan account) there are four key dates to watch out for when you will need to know the amount you owe:
- The start of the tax year (6 April)
- The end of the tax year (5 April)
- The end of your accounting period
- Nine-months after the end of your accounting period
There are two main tax consequences as follows:
1. Benefit in Kind
If you receive a loan from your company in excess of £10,000 which is tax-free, or carries a low rate of interest, then you have received a benefit in kind. The amount of this benefit is the interest you have avoided by not taking out a commercial loan.
The value of the benefit will usually be calculated by taking the average of the balances at the start and end of the year. However, you as the taxpayer can elect to use a ‘precise’ method which calculates interest on the loan outstanding on a daily basis. It’s also possible for HMRC to require interest to be calculated in this way.
You have two options for dealing with this benefit in kind:
The first is to make sure you pay the company the appropriate amount of interest each year based on HMRC’s approved interest rates. These are published on their website and are currently 2%. Technically, there should be a legal agreement in place by the end of the relevant tax year to pay interest on the loan and if there is no such agreement HMRC may deny relief for interest paid.
This interest would of course be taxable income for the limited company.
The alternative is to accept the benefit in kind. The company will need to complete a form P11D showing the value of the benefit, and provide this to you and to HMRC by 6 July following the tax year end. You will be taxed on the value of the benefit at your marginal rate and the company will pay Class 1A National Insurance, currently 13.8% and increasing to 15.05% from April 2022.
Companies will often allow the loan account to build up during the year and then clear it down at the year end by voting a dividend or applying a salary. However, HMRC are much more likely to require the ‘precise’ method of interest to be charged if they can see the account becoming overdrawn during the year and being repaid close to the year end, particularly if the balance goes above £10,000 during the year. It would be advisable to vote the dividend or salary earlier in the year before the account goes overdrawn.
2. Company loan tax charge
If the director owes money to the company at the accounting year end, and this is not repaid in full within nine months of the accounting year end, there is a tax charge of 32.5% applied to the outstanding balance. This will increase to 33.75% from April 2022.
This can be repaid to the company once the loan itself is repaid, but the tax repayment can only be claimed through the corporation tax return so there may be some delay in getting it back.
This applies to all loans, even those below £10,000.
The above is a summary of the rules and there are of course a number of complexities, exceptions and other factors which may need to be taken into consideration.If you need any further advice or assistance, please get in touch with us here.
