Should I charge interest on money I lend to my own limited company?

Should I charge interest on money I lend to my own limited company?

The answer is very clear, if you lend money to your company, YES, you should definitely charge interest at the commercial rate.

What if I do not charge interest?

If you lend money to company and do not charge interest you will have to report it on your company tax return. Is this correct that non charging of interest has to be reported as many directors when start business lend money and do not charge interest 

What if I do charge interest?

If you do charge your company interest on a loan, the interest counts as a business expense for your company and personal income for you. The income to you (the interest) will have to be reported on a self-assessment tax return.

The company must pay you interest at the commercial rate less income tax at 20% every quarter and report it every quarter on a form CT61.

Isn’t that good?

In certain circumstances, you can set the interest paid on the loan against profits, but as you can see, the administration is getting rather wearisome. Having established that yes, you should charge your company interest on a loan, then the question is, is this a tax efficient way of going about things?

Is lending money to the company and charging interest tax efficient?

The answer is no, not really, although sometimes it can be useful:

1. If your company’s making a loss I think it is beneficial if company is making profit so that interest can be set off against profits
2. If your salary does not cover your personal allowance (£9,440)
3. If you take out a personal loan to lend to the company

What if I’m thinking about lending money to my company?

If considering lending your company money please check with your account manager first. It is always worth looking at the long-term picture, which we call tax planning, and at which DNS are experts.

Also See: Complete guide on Directors Loans Accounts

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.