I have a client company - providing contract services. Director's loan account is £100 000 in credit. Yes credit!!!
The company has the money in Current Account earning 0% interest!!!
The money has not been earmarked for investment. The director has been too busy to withdraw the money and invest it.
Can the company pay the director interest? and if so at what %
This will save Corporation Tax and Dividend Tax as some / all of the interest can be taken tax free. And reduces the 7.5% dividend tax too.
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What rate of interest would the company pay on an unsecured loan of £100k from an unconnected lender? That's your starting point.
Just out of interest (sic), why would the interest be tax free?
Just out of interest (sic), why would the interest be tax free?
Well, it depends on the director's income, which we don't know, but you may well be right.
Would have thought interest up to 12% pa acceptable. Might have to complete CT61 forms?
Might think about going back 6 years too if it makes sense from a personal tax /company deduction perspective?
Other things you may need to think about are:
Does the company need the loan? Can it justify the cost to the shareholders? Would you charge interest if he was overdrawn - at what rate?
As to the rate, you can also start from the other end - what rate would he get if he did invest elsewhere?
HMRC's standard rate (currently 2.75%, I believe) is one few could argue with.
Then, it's not really an unsecured loan - so go somewhere in the middle. It all depends what you want to achieve.