If you have a need for some short term funding, taking a loan from your company is straightforward, and can help plug any short term cash flow problems you may have. And if you are a higher rate tax payer in the current tax year and don’t want to attract the top end tax that your dividends do, taking a loan can often be the best way to go.
There are some rules though, and this brief guide gives you a quick outline of what they are. If you have any more questions about this, feel free to get in touch with us.
1: Loan less than £5,000
This is the simplest scenario. There is no personal tax benefit charge on taking a loan of less that £5,000 from your company, and this is a good way to get access to company funds in the short term.
2: Loan greater than £5,000
The tax office regard a loan of over £5,000 as a personal taxable benefit. Note the entire loan is assessed as a personal benefit, not just the amount exceeding £5,000. To eliminate the personal taxable benefit, you need to pay your company interest from your personal bank account on the loan balance at a rate of 4.75% (as at today – check http://www.hmrc.gov.uk/rates/interest-beneficial.htm to get the latest rate). This loan rate is set by the HMRC.
We suggest the loan interest is calculated and paid annually for every personal tax year the loan is outstanding (ie for each year to 05 April). The interest is calculated on the average loan balance for the year, and we can help you with this calculation. Please just ask us.
You will also need to draw up a loan agreement between yourself and your company to record the loan details, and interest payments that will be made. We can help you prepare this too.
IMPORTANT 1
The loan needs to be repaid back into your business bank account within nine months of your company yearend. So if your example you took a loan on the 01 July 2008, and your company year-end is 30 November 2008, then the loan needs to be repaid by 30 August 2009. You can find your company year-end date under the heading ‘Company year end’ on your No Worries online ‘My Company Operations’ page.
IMPORTANT 2
If the loan is not repaid within nine months of the company year end, the company will incur a tax charge of 25% of the loan balance outstanding at year end. This tax is ‘temporary’, and is repaid back to the company once the loan balance is settled.