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Lending money to a limited company

As a company Director, can you lend your company money and charge interest on the loan?

As a company Director you are able to provide a loan to your company and claim interest, here’s what to do and the tax implications.

The first thing you will need to do is check your company’s articles of Association to see if there are any special terms or restrictions on any loans to the company from a Director. If the loan is allowed, a loan agreement will need to be drawn up outlining the size of the loan and the repayment schedule. The loan will sit on the balance sheet of the company accounts and interest will be chargeable. The company will pay interest on the loan, less the basic rate of 20% tax. Each quarter the company must complete and file a CT61 return and pay the income tax to HMRC.

Any interest you charge on the loan will be a direct expense to the company and help with corporation tax. On the flip side of this, the interest charged will also be classed as personal income and will need to be declared on your personal tax return and taxed at 20% for basic taxpayers and 40% for higher taxpayers. That said, each basic rate taxpayer has a tax-free savings allowance of £1000 per year, £500 for higher rate taxpayers.

In terms of interest chargeable, as far as I am aware, providing the interest is not excessive, there is no set interest rate. Depending on your circumstances, it may be prudent to charge a rate of interest that keeps you in line with your personal savings allowance, so you don’t pay personal tax. An example of this would be as follows:

If you lend your company £20,000 at an interest rate of 9.3%, you would receive over the course of the year £997.40 in interest, all tax-free if you’re a basic rate taxpayer.

2019-05-09T09:22:22+00:00May 9th, 2019|Tax Tips|