Company loans can be a useful perk, but there can be two tax charges (if you own >5% of the share capital). One is a temporary charge on the company and the other is a permanent charge on the director as a benefit-in-kind (BIK).

The tax charges are:

• The company pays additional corporation tax, currently at a rate of 32.5% on the loan balance.
• This is refundable once the loan as been repaid, but not until 9-months after the end of the Accounting Period (AP) where the loan was repaid.
• E.g. company with yearend 31-Dec-17 and a loan is repaid say March 2018. The AP is 31-Dec-18, so the corporation tax is not refundable until 30-Sep-2019.
• The director has to pay Tax & NI on the BIK. The BIK is because you have an interest free loan or low interest loan.
• This is subject to both 13% NI & 20% tax (40% tax for higher rate tax payers).
• Thus the tax charge can be as much as 33% (53% for higher rate tax payers).

As the company tax charge is later refundable, this is not major concern other than the cash flow.

AVOIDING THE PERSONAL TAX CHARGE

It is possible to wipe out the BIK tax charge on the director.

If the director agrees to pay their company interest ≥ the official rate of interest (issued by HMRC), then the BIK no longer applies.

Caveats

• The current official rate of interest is 2.5%.
• The interest must actually be paid - cash; no adjusting the director's loan.
• Must create a signed loan agreement.

Any interest paid is company income, thus subject to corporation tax 19%.

The balance becomes part of the profit available for future dividends, so you get the 81% back anyway through dividends.

Example

Director borrows £40000. the interest payable would be £1000.

BIK tax charge will be £330 or £530 higher rate tax payers, out of pocket.

Corporation tax on the interest is £190 (Paid to the company £1000; returnable later as dividends £810).

TIP: by where interest payable on a loan, put this in writing to make sure of the tax deductibility.