If you business borrowed money from a bank it would pay interest, so why shouldn’t it pay you?
Here’s what you need to think about if you want to charge interest on Directors Loans to a Company.
How Much Interest Should You Charge on Your Directors Loan?
You can set the rate however it must be reasonable.
Take a look at what the interest on a similar loan would be if the Company were to borrow from a Bank or other Lender.
Don’t get carried away. There are tax implications for charging an inflated interest rate on a Loan. You’ll could face needing to pay P11d Benefit in Kind tax if HMRC consider the rate charged unreasonable.
Do you Need any Paperwork in relation to the Interest on the Directors Loan?
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.
Aside from keeping HMRC happy, if there are other Directors or Shareholders that agreement can act as protection for you.
Don’t forget to double check whether this is all allowed under the terms of your Articles of Association.
Do I just draw the money?
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.