Directors sometimes like to borrow money from their own company
Should they pay interest to their own company in order to avoid tax?
Well let’s look at the tax consequences first and then examine ways to mitigate exposure to tax
The first point to note is that the company will need to pay corporation tax of 32.5% (s455 charge) but will be able to recover all this tax once the director has repaid the loan. So tax neutral
If the loan is under £10,000 then the director will not have to pay any personal tax
What if the loan was £50,000?. Then the benefit in kind for the director would be approximately £1250 and the personal tax liability (if they are a higher rate tax payer) would be £500. Not really a great deal of money given they have borrowed £50,000 from the company
However, this personal tax liability could be reduced to nil if the director paid interest of £1250 to the company
Is this a good idea?
Let’s go through the figures together:
The company receives £1250 interest and will need to pay corporation tax of £237 which will leave £1013 in the company. If the company paid a dividend of £1013 back to the director, then as they are a higher rate taxpayer, there would be a personal tax liability of £329. So the company is left in the same position but the director will pay total tax of £566! This is more tax to pay than if the director did not pay the interest back to the company!
If the director was a basic rate taxpayer then it is likely it would benefit paying the interest back to the company
So, do the numbers to see which method is likely to result in the least amount of tax for the company and the director
It is always important before you take any action that you obtain professional advice. If you have any questions in respect of the above, then please do not hesitate to contact our tax experts by sending an email to firstname.lastname@example.org