In short, YES you can charge interest on a Directors Loan. But there are some tax and accounting implications to be aware of if you choose to do so.
How to Lend the Money
Just transfer it into your Limited Company bank account and set up a Directors loan account to keep track of it.
How Much Interest Should I Charge on the Loan
Probably the best rate to charge is the market rate of interest. Have a look around at what high street banks are charging to give yourself an idea of what the cost of the loan should look like.
Do I Need Any Paperwork?
Yes. The Directors loan accounts is one of the most scrutinised accounts by HMRC. So make sure you get your paperwork in order.
Draw up a loan agreement detailing dates, repayments and interest charges. Don’t forget to double check whether this is all allowed under the terms of your Articles of Association, drawn up when you formed your Limited Company.
Do I Just Repay the Loan from the Company Bank Account
Yes, draw the money in accordance with the loan agreement. However the Company must deduct income tax on the interest payments at the basic rate of 20% (It’s like when you receive interest from a bank on a deposit account).
What are the Tax Implications
For the Company, it must keep in mind the following tax implications of the interest:
- It will get corporation tax relief on the interest it pays;
- It must submit a CT61 to HMRC to let them know what income tax has been deducted from the interest it has paid you.
For the Director making the loan:
- The income (interest) needs to be declared on your self assessment tax return;
- There needs to be an adjustment for the 20% income tax deduction made when the Company paid you.