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In this blog we will look at the main tax impacts when directors either take money out of their companies or put it in.
In cases where directors withdraw money, care is required to ensure it isn’t treated as income – both the amount withdrawn and any implied interest on it.
For cash injections into the business, any interest charged has to be at a commercial rate.
In summary, directors cannot do so tax-free other than over short periods.
It is only permitted where the company is not in financial difficulties.
Any loans over £10,000 must have shareholder approval and at this level or above will be treated as a benefit in kind for interest purposes (ie will be deemed to carry interest at HMRC’s prevailing – and low – interest rate even if its nominally interest free).
If the loan is still outstanding 9 months after end of financial year in which it is drawn, then company must pay 37.55% tax on it (ie treated as a distribution under section 455). Note this is refundable when the loan repayment is made although only 9 months after the end of the financial year in which repayment is made.
These tax rebates must be claimed within 4 years via an online claim which is NOT part of the annual tax return.
Rules on director loans cannot be circumvented by “bed and breakfasting” – repaying the loan shortly followed by taking it out again.
Similarly, any loan write-off would also be classified as dividend income to the director and thus taxable. Furthermore, such a write-off is treated as earnings for NIC purposes if it constitutes remuneration or profit derived from employment. Note also that a loan write-off would not be considered as part of the £30,000 tax-free redundancy payment allowance.
The interest on directors loans to their companies is fully tax deductible providing that:
In the hands of the director, such interest whilst potentially taxable, will qualify for the annual savings allowance (currently upto £5,000) and the interest allowance (currently upto £1,000).
State Pensions (03/2023) Blog The following rules apply assuming you will reach the state pension age after April 2016 (otherwise slightly different rules are required).
Directors’ Loans 06/2023 Blog In this blog we will look at the main tax impacts when directors either take money out of their companies or
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