Paying interest to the director

Rebecca Cave
Tax Writer
Taxwriter Ltd
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The savings rate band combined with the savings allowance means that directors may be better off taking interest in place of some dividends, explains Rebecca Cave.  

The government surely didn’t intend directors to extract up to £22,000 tax free from their own companies each year, but that could be possible from 2016/17 using the following allowances:

  • personal allowance (PA): £11,000 - all income exempt from tax
  • savings rate band (SRB): £5,000 - interest taxed at 0%
  • personal savings allowance (PSA): £1,000 - interest taxed at 0%
  • dividend allowance (DA): £5,000 - dividend taxed at 0%

I emphasis “could be possible” as in many cases it won’t be achievable, because the company won’t...

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29th Feb 2016 21:19

My experience of when this works
This idea of charging interest on loans to the company from directors has come up in practice a couple of times. Most notably when a client took out a loan in their own name and lent the money to the company to buy the property from which they traded. They charged the company interest on this loan. The company got tax relief on the interest paid and the client was taxable on the interest but was able to offset the loan interest as a qualifying business loan.

See my blog post from 2014 on the same here

Thanks (1)
01st Mar 2016 13:06

What rate?

The big question then as I raised on this forum the other week - what is the appropriate market rate of interest that would be acceptable to HMRC?

The illustrative figures of £8,940 interest on £110,000 loan is I think unduly modest.

I don't think we have to use the cheapest rate out there, as long as it is not unreasonable. One of my clients just got a 1 year unsecured tax funding loan from a reputable lender at an APR of about 24%. And then there are the Wonga rates.

It would be good to have some consensus/guidance.

Thanks (1)
By cfield
08th Mar 2016 13:12

How much should the fee be?

I generally recommend 10% to my clients as a commercial interest rate for an unsecured loan. Bank loans with security tend to be a bit less but it looks reasonable enough to me.

Interesting point about the interest not being a tax deductible trading expense if the company doesn't need the money. However, if the company invests that money and earns interest on it, the taxman still wants his pound of flesh then, so you could argue that it is a cost of generating taxable income.

How much should we charge for doing all this extra work? Obviously there's the CT61 and the calculation of the interest, plus the SA tax return, which will probably have a different figure to the one in the accounts. I've always added an extra £150 to my fees for owner-managed companies. However, on a value-added (or tax saved) basis, a higher fee might be justifiable now.

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17th Jun 2016 10:33

Note the new version of form CT61 has just been released:

You can download the notes to CT61, but the actual form must be requested for each company as it is printed with the reference number for the company. You can request forms CT61 for up to 5 companies on one structured email to HMRC, or by calling one of the CT offices.

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17th Aug 2016 16:49

So you are looking at £9k interest all up (8%)
its all tax free, but if the co doesn't need the cash, its not tax deductible.
You will however be saving the 7.5% dividend tax which is £675.
Assuming its one CT61 a year and you charge £160+vat. then the clients up £475 if he has £100k on deposit.

If he has £50k Then you are saving £130

and at the £30k level you break even, unless you do the CT61 yourself.

Of course if the companies skint, its more risky, it needs the money, up goes the rate to 20% and its tax deductible and the £475 gain might be made on a £40k investment.

You are playing with crumbs whichever way you cut the cake

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By Neilox1
20th Apr 2017 11:24

If dividends are over £5k will the difference be added to the income and therefore reduce the SRB £5k allowance? HMRC aren't very clear, or are dividends always taxed last? EG salary £11k, interest £5k, dividends £9k would this reduce SRB by £4k?

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