There are lots of circumstances that mean you may need to loan money to your Limited Company. Perhaps you are starting a new business venture and your Limited Company is struggling to raise start up capital itself. Or maybe your Company has a few Directors on the Board but you are the only one lending money so want to attach some interest terms to your loan.
In short, YES you can charge interest on the money you loan.
How should I lend the money?
Just transfer it into your Limited Company bank account. Your accountant should help you log the transaction correctly.
How much Interest should I charge?
Probably the best rate to charge is the market rate of interest. Have a look around at what high street banks are charging to give yourself an idea of what the cost of the loan should look like.
Sounds easy, do I need any paperwork?
Yes. The Directors loan accounts is one of the most scrutinised accounts by HMRC. So make sure you get your paperwork in order. Draw up a loan agreement detailing dates, repayments and interest charges. Don’t forget to double check whether this is all allowed under the terms of your Articles of Association, drawn up when you formed your Limited Company.
Do I just draw the money?
Yes, draw the money in accordance with the loan agreement. However the Company must deduct income tax on the interest payments at the basic rate of 20% (It’s like when you receive interest from a bank on a deposit account).
What are the Tax Implications?
For the Company – the company will get corporation tax relief on the interest it pays. AND each quarter it must submit a CT61 to HMRC to let them know what income tax has been deducted from the interest it has paid you.
For you, the lender – you have received income so there are rules for declaring this on your self assessment tax return, with an adjustment for the 20% income tax deduction made when the Company paid you.