Many businesses will require investment from their directors at some point, whether for start-up costs, to finance the purchase of machinery or simply for working capital during lean times. If this is the case, individuals or directors can charge interest from the company on any money they have borrowed from personal funds and have not yet repaid (your directors loan account). Interest must be charged at a commercial or market rate. This blog will make you understand whether an individual or director can charge interest on the loan from the company. If yes, then what will be the tax implications?
- What is CT61?
- Whether an individual or director can charge interest on a Director’s loan?
- Record keeping
- Tax on loans
- If the director owes the company money
- If the director lends its company money
What is CT61?
CT61 is a form used to claim income tax return, interest return and return on alternate finance payments. The Company can also claim a return on manufactured payments from abroad and tax on relevant distributions. You can download the form CT61 from here.
If the Company pays interest on the director’s loan, it must register with HMRC and file CT61 Returns, which require the Company to deduct 20% tax on the interest. The interest is then declared on the Directors personal tax return, but it could be tax-free if the interest is covered by the Personal Savings Allowance. Numerous businesses are unaware of this requirement, making them vulnerable to penalties and other mandatory payments.
Whether an individual or director can charge interest on a Director’s loan?
Yes, an individual or director can charge interest from the company. Interest on company accounts will be deductible as a business expense for Corporation Tax purposes. This does, however, mean that any interest earned by the director will be subject to income tax.The director may be able to charge the company interest on this loan in the following manner:
- Any interest paid on loan is tax-deductible for the corporation tax, i.e., currently 19 percent.
- While interest is included in the directors total income for self-assessment purposes, it may be more tax-efficient than taking a dividend, particularly if the director has not fully utilised the interest allowances (£1,000 for basic rate and £500 for a higher rate).
For example - if a company pays £100 as payment of interest, the director will receive £80 in cash, and the company will pay the remaining £20 to HM Revenue & Customs. If you are a lower rate taxpayer, there will be no tax on this interest. However, there will be additional tax to pay when you file your tax return if your income is in the higher brackets.
A director must keep track of any money borrow or pay into the business - this is commonly referred to as a directors loan account. It is critical to keep track of any loans directors make to the company, whether they are cash loans, deferred salary payments, or payments for products or services purchased on behalf of the company. These loans are credited to the Directors Loan Account (DLA) and are reported on the balance sheet as current liabilities when the company files its annual statutory accounts.
Note - Corporation tax will not be payable on any loans made by company directors.
Tax on loans
The Company may be subject to taxation on directors loans. A company could also be required to pay tax if an individual is both a shareholder (occasionally referred to as a participator) and a director. An individual personal and business tax obligations are contingent upon whether the directors loan account is:
- Overdrawn – Director owes the company
- In credit – The Company owes the director
If the director owes the company money
If a company takes a directors loan, it may be required to pay tax. Director’s personal and business tax obligations are contingent upon how the loan is settled. Additionally, the company should determine whether they are subject to additional tax obligations if:
The loan exceeds £10,000 (£5,000 in 2013-14)– If an individual is both the shareholder and a director and their company owes more than £10,000, the company must :
- Consider the loan to be a benefit in kind,
- Deduct Class 1 National Insurance.
Directors must include a loan as a deduction on their personal Self-Assessment tax return and may be required to pay tax on the loan at the official interest rate.
If director pays interest below the official rate- If an individual is both a shareholder and a director, a company must comply with the following:
- Interest paid below the official rate should be recorded as company income.
- Discounted interest should be treated as a benefit in kind.
Interest must be declared on a self-assessment tax return and director may be required to pay tax on the difference between the official and actual rates.
If the director lends its company money
Corporation Tax is not payable on the money you lend to the company.
If interest is charged
Interest charged by the director from its company on loan qualifies as both:
- Company’s business expense
- Director’s personal income
Director must record the income on a personal tax return known as a “Self-Assessment”.
A Company must:
- Pay you the interest less the basic income tax rate of 20%.
- Use form CT61 to report and pay the income tax each quarter.
You can obtain a copy of form CT61 online or by contacting HM Revenue and Customs.
HMRC Shipley Accounts office Address
0300 051 8371
Monday to Thursday, 9am to 4:30pm
Friday, 9:00 a.m. to 4:00 p.m.
We have extensive expertise advising on all areas of director’s loans and company loans, whether the documentation required or the tax and business considerations that may arise. If you're unsure whether you are correctly accounting for tax on interest payments, please contact DNS Accountants on 03330886686, or you can also e-mail us at email@example.com
Disclaimer : - "This article was correct at the date of publication. It is intended for general purposes only and does not constitute legal or professional advice. Independent professional advice should be sought before proceeding with any transaction".