There are many situations that lead to a Director needing to make a loan to a Company for example to provide start up funds or help the business through a temporary cash flow problem.
In these situation you may want to attach certain terms to your loan, including charging interest on your Directors loan to the Company.
How Much Interest Should You Charge on Your Directors Loan?
You can set the rate however it must be reasonable. So take a look at what the interest on a similar loan would be if the Company were to borrow from a Bank or other Lender.
There are tax implications for the Interest and charging an inflated interest rate on a Directors Loan can attract a Benefit In Kind tax charge, if HMRC consider the rate charged unreasonable.
Do you Need any Paperwork in relation to the Interest on the Directors Loan?
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. Aside from keeping HMRC happy, if you have other Directors or Shareholders as part of the Company, the agreement can act as protection for you and the money you loan.
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.
Benefits of Hiring a Non Executive Director