Borrowing from your company – Beware the tax traps!

Whilst it may be “your” company, it is a separate legal entity from you, and you cannot just “help yourself” to the cash without considering the tax ramifications.

A director, employee or shareholder can borrow up to £10,000 interest free without any tax or NI charges applying. If the borrowing goes above that the whole loan, not just the excess over £10,000 gives rise to a taxable benefit. This could be used for instance to enable employees to buy season tickets for travel, or indeed, for any other purpose.

There is a benefit in kind charge on the director, at the rate of 2.25% currently (2023/24), although given current interest rates, this is likely to increase substantially from April 2024.

A £20,000 loan provided to an employee throughout the tax year 2023/24 would give rise to a taxable benefit of £20,000 * 2.25% = £450 on which tax would need to be paid. This could be avoided if interest is paid though – it then becomes taxable inside the company.

If the loan of £20,000 is to a director or participator (broadly, someone with shares in the business and a close company which has 5 or fewer shareholders), and this loan is not repaid within 9 months of the company year-end, s455 tax is payable to HMRC – effectively a “loan” to HMRC, repayable nine months after the year end in which the loan is repaid (or part repaid). This is at a rate of 33.75%, so in this case, £20,000 @ 33.75% = £6,750 needs to be paid over.

There are anti-avoidance provisions which mean the tax charge cannot be avoided. The 30 days rule comes into play where, within a 30-day period of making a repayment of £5,000 or more, the director withdraws further money from the company via their director’s loan.  In such instances, the rule ignores the repayment for the purpose of S.455 tax and looks through the transaction, and the charge is still due in full.

There is also the arrangements rule which needs to be considered, which takes effect where the balance of an outstanding loan immediately before repayment is at least £15,000, and at the time the loan repayment is made, there is the intention to subsequently borrow at least £5,000.  If this happens, the difference between the repayment and the additional borrowing is what is classed as the ‘actual repayment’, with S.455 still required on the remaining balance.

Taxable income such as salary or dividends credited to a director’s loan account are not affected by these rules.

This can be a complex area and great care is needed with directors’ loan accounts which must be kept under constant review, and proper paperwork is essential.

Please contact us if you would like to discuss this further or require further clarification.