Lending Money To Your Company

Lending Money to Your Company

Key Considerations

In today’s climate, directors may need to consider lending personal funds to their companies as a flexible and tax-efficient way to boost cash flow. Below highlights the benefits of charging interest on a director’s loan and the administrative requirements, including the CT61 Form.

Why Lend Money?

Lending funds can help directors support their businesses when other finance options are limited or costly. A director’s loan offers flexibility without the stringent terms associated with traditional loans, and charging interest can be beneficial.

Key Benefits of Charging Interest

Personal Income
- Directors can earn interest income on their loan, which is not subject to National Insurance. They may also benefit from the Personal Savings Allowance (PSA), which allows basic-rate taxpayers to receive £1,000 in tax-free interest, and higher-rate taxpayers up to £500
Corporation Tax Relief
- Interest payments may be deductible for corporation tax relief, reducing the company’s taxable profit which can save up to 25% in corporation tax. However, interest rates should be commercially reasonable to avoid HMRC scrutiny.
Improved Cash Flow
- A director’s loan provides quick access to funds, supporting growth, projects, or covering short-term needs without the complexities of external loans
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CT61 Form – Key Administrative Requirements

If the company pays interest of the loans, it must file aCT61 Form to report interest paid and deduct basic rate income tax (currently20%). The CT61Form is filed quarterly, and failure to submit can result in penalties. Proper record keeping is essential for tax compliance and to support the director’s self-assessment tax return.

The director receives a tax credit for the 20% tax withheld by the company. The credit is offset against their personal tax liability and reduces the amount of additional tax the director may need to pay.

Important Considerations

Documentation
- Formalise the loan with an agreement detailing the amount, terms and interest rate
Commercially Reasonable Rate
- Making sure that the rates are not excessive to prevent HMRC challenges
Tax Obligations
- Interest received is taxable and reported on the director’s self-assessment tax return. With a credit given for the 20% tax paid by the company.
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Example

As an example, for a £20,000 loan with a 7.5% interest rate, the company would pay an annual interest of £1,500.

Taxpayer	Interest	PSA	Tax Rate	Gross Tax on interest	Tax Credit (CT61)	Net Tax Cost (Director)	Net Income for Director	Corporation Tax Savings	Net Tax Cost (Overall)
Basic-Rate	£1,500	£1,000	20%	£100	£300	-£200	£1,700	£375	-£575
Higher-Rate	£1,500	£500	40%	£400	£300	£100	£1,400	£375	-£275
Additional-Rate	£1,500	£0	45%	£675	£300	£375	£1,125	£375	£0

Conclusion

A director’s loan can be an effective way to support business growth while generating personal income. However, compliance with tax and administrative requirements, particularly with CT61 Forms, is crucial.

For further assistance in managing director’s loans, interest payments, or CT61 compliance, please feel free to contact us.