Newsletter Spring 2018

Loans and interest

Directors and employees sometimes borrow from their company, intending to pay the money back, but the actual repayment gets delayed. This can lead to a benefit in kind tax charge on the individual, and a class 1A NIC charge for the company.

These charges can be avoided if the amount borrowed at any point in the tax year doesn’t exceed £10,000. If a greater amount is borrowed, there will be no tax charge if the individual has agreed to pay interest on the loan at a rate equal to or greater than the Official Rate (2.5%).

This interest must actually be paid to the company, not just accrued. Although there is no deadline for paying the interest, it's best to pay before 6 July following the end of the tax year, as that is when the form P11D must report any interest-free loans.

Directors and their family members can trigger an additional tax charge for the company if they don’t repay their loans promptly. That tax charge is calculated as 32.5% of the loan balance which is outstanding more than nine months after the end of the accounting year in which the loan was advanced. There is no minimum threshold for this tax charge.