Our Tax Tip number 6 is to use loan agreements. And understand the consequences for taking loans from your business and potentially making late repayments. Watch our video for some more guidance.
What happens if I borrow from my company?
So, what you need to know about taking a loan from the company?
If you do take a loan from the company, the company has to pay tax at 32.5% at its year-end.
The company pays this tax as part of its Corporation Tax return and it’s basically done to stop you taking the money tax free and running and never repaying it.
That 32.5% is repayable by HMRC when you repay the loan because the idea is that, when you do repay the loan, you’ve probably taken the money out as a dividend that has been taxed elsewhere.
However, sometimes it could be worth taking that loan out rather than taking a dividend.
This is relevant if you’re paying tax on your dividends at 38.1%, ie if you are an additional rate tax payer earning more than £150,000.
In this case, the loan is cheaper than the dividends.
What happens if I lend money to my company?
What do you need to know about lending money to the company?
If you lend money to your company, as is often the case when you first set up your company, you can actually charge interest to the company.
The interest does need to be at a commercial or market rate but there can be a tax benefit.
The company can claim tax relief on the interest paid but you might receive the interest tax-free.
A basic rate taxpayer can earn up to £1,000 each year tax-free. A higher rate taxpayer can earn up to £500 tax-free. However, there isn’t a tax-free allowance for additional rate taxpayers.
If you would like any more information, please feel free to get in touch.