Interest on Directors Loan

Interest on Directors Loan

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If a dividend/salary is paid to a director, but the director doesn't draw the cash from the company, can the company then pay interest on that loan without falling foul of PAYE/NIC legislation.

If so, at what rate and does income tax have to be withheld on the payment?
Neil Wilson

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By NeilW
15th Mar 2005 12:39

Or
you have third party shareholders.

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By mjswebster
15th Mar 2005 19:11

"Otherwise, how can it be better than dividend?"
"Very easily" is the answer to that one. Companies obtain tax relief on interest paid, whereas they don't on dividends paid. Depending on the marginal rate of Corporation Tax payable by the company, interest can be much more tax efficient way of extracting funds than dividends.

eg consider a company paying marginal rate of tax (ie profit £300k - £1.5m). Each addtional £100 profit costs the company £32.75 in extra CT. Suppose the company wants to distribute £100 to a director. If it pays it as a dividend, it pays out £100, and a higher rate taxpayer ends up with £75 after tax.

If instead it pays interest on the directors loan, it can afford to pay out £148.15, as it gets CT relief of £48.15, costing it a net £100 as before. A higher rate taxpayer ends up with £88.89 after tax. So paying it as interest instead of a dividend has increased the net income of the director by a massive 18.52% compared to what he would have had as a dividend. The same applies to companies paying the full 30%.

Companies paying small companies marginal rate of 23.75% (ie profits £10k to £50k) could also be better with interest, but this may depend on the effects of the non-corporate distributions rate too.

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By User deleted
14th Mar 2005 15:15

In addition to Mark's comments
I would add that there ought to be some form of written documentation showing that the company agreed to pay the interest and that the rate be commercial and linked to bank rate.

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By User deleted
17th Mar 2005 01:02

Interest paid on DLA is necessary...
In two cases I deal with the businesses were funded by personally raised finance injected into the Ltd Co.

To get tax relief on the personal finance interest it is necessary to have an income from which to deduct the interest paid on personal finance loans.

If dividends were drawn from Ltd Co., then no benefit by deducting the interest relief.

If salary drawn, then tax relief wiped out by NIC costs.

Hence, Ltd Co pays interest to the director equivalent to the interest the director pays on the personal finance and tax relief is obtained in the Ltd Co accounts for the interest paid on the personal finance loans.
It's untidy involving CT61 proceedure, but necessary when banks will only lend to the director rather than the company.

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By martinfoley07
16th Mar 2005 15:56

good point, Michael.........
.............I wasn't thinking up to the giddy heights of £300k plus. Some day.......

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By martinfoley07
15th Mar 2005 12:08

yes but..............
.....................only worth doing if unrelated party directors have differential loans in the business. Otherwise, how can it be better than dividend?
Martin

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By User deleted
13th Mar 2005 09:32

Interest on DLA
Yes it is acceptable for interest to be paid to a director on his DLA.

In those cases that I've dealt with in the past, form CT61 has been used (calendar quarterly basis, or part-quarters where spans FYE) to declare and pay over the 20% savings interest rate deduction.

The interest so paid is deductible from company profits as an expense.

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