Many limited company directors will no doubt find themselves needing or wanting to inject money into their business at some stage, whether this is to help with investment or substantial one-off expenses etc. It’s a great option for start-up companies or those who expect that their business will need an influx of cash in the near future.
But can – and should – you charge interest on your director’s loan? There’s no clear-cut answer, unfortunately. It’s something that needs to be carefully considered and decided on an individual basis. We’ll cover this in more detail below.
Can You Charge Interest On Your Director’s Loan?
The short answer is: yes, you can. But whether you should will depend on your individual circumstances. Directors can loan money to their limited company, and are also able to charge interest on that loan. But you will need to justify this to HMRC; along with a justification for the interest rate that you intend to charge (it needs to be set at a commercial rate).
There are both positives and negatives to charging interest on your director’s loan. The interest that you receive from the loan can often be extracted tax-free
The interest will only be tax-free if it falls within your allowances for that tax year, specifically your Personal Allowance, starting rate for savings, and Personal Savings Allowance. Your tax-band and income across all sources will factor in, so you could have to pay tax at 40% or 45% on this income. You can learn more about allowances here, or speak to your accountant who will be able to advise you of the potential tax implications involved.
It’s worth noting that this does come with quite a bit of paperwork for both you and your company (you will need to declare the income on your Self-Assessment Return and the company will need to report it via the CT61 form).
In addition, your company will be charged 20% tax on the interest payment. However, this is a tax-deductible expense meaning that it will reduce your company’s profits and therefore it’s Corporation Tax. So this could prove to be a rather tax-efficient method, if you are not getting an extra tax charge on the interest paid to you.
It’s Not A One-Size-Fits-All Approach
As we mentioned above, charging interest is something that should be carefully considered and looked at on an individual basis. It’s definitely not a one-size-fits-all approach and may not prove beneficial in certain circumstances, especially when you factor in the additional paperwork and justification required!
The Best Thing To Do – Seek An Accountant’s Advice!
If you’re considering charging interest on a director’s loan, we highly recommend that you do so under the supervision of an accountant. They’ll be able to evaluate your situation and help you make the most effective and appropriate decision to suit the needs of both you and your business. For more information, please get in touch and one of our experienced accountants will guide you through the process and discuss any potential tax savings you could make!