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Interest charged on credit directors loan account

When is it a good idea for tax to charge interest to a company for a credit directors loan account?

For an owner managed business, assuming small salary and balance in dividends is going to be used, charging interest just swaps 21% for 20%, but reduces the basic rate tax band available for dividends, potentially pushing some dividends in to higher rate tax?


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By Anonymous
10th Mar 2010 18:52

Do the numbers

Assume individual is a higher-rate (40%) taxpayer. A dividend will be taxed at 25%. Interest will be taxed at 40%, but with a 21% saving for the company. Adverse cashflow implications - CT61 - but overall a 6% saving. Not huge, when you consider that the interest rate should not be excessive. eg to get a £3k saving would need an interest payment of £50k. At 3% over base, that would require a loan of approaching £1.5m. If a director has been able to lend to that extent, he probably isn't too bothered about saving a couple of grand or so.


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10th Mar 2010 19:00

I think ...

... the main benefit is when there are more than one directors, each with substantially different credit balances on their loan accounts which are not in proportion to their (non-alphabet) shareholdings, and the directors desire to provide some sort of commercial restitution between them for that discrepancy while providing an incentive to leave working capital in the company.  There being no NIC, the tax implications tend not to be the driving force.

With kind regards

Clint Westwood

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By DMGbus
11th Mar 2010 08:51

Use of otherwise wasted PA

In many cases the salary of an owner managed company is currently £5,715 - ie. at such a level that as much of the £6,475 personal allowance is used without incurring 23.8% of NIC costs.

This leaves wasted / unused personal allowances of £760, which really will be wasted unless there's some other income to set these allowances against.

So, if £760 of interest could be justified as a charge to the company the tax effect would be as follows:-

# Absolutely zero effect on the director's personal tax (higher rate or not as the £760 is taxable at nil using up otherwise wasted PA) and no National Insurance cost

# £760 x 21% = £159.60 CT reduction a saving in Corporation Tax

Not to be overlooked is the need to complete form CT61 (deduction of tax from interest paid).

As an alternative (avoiding CT61form, but requiring Land & Property pages on the director's Tax Return) is if a commercially justifiable rent for use of home as office facilities were sufficient to produce £760 profit for the director then this would have an identical Income Tax (zero cost) and CT (£159.60 reduction) effect



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