Say my limited company account has reserves around 30k. If I needed some extra cash (after the allowance in dividend and PAYE), i thought the straightforward thing would be taking more dividend by paying 25% tax on it. But my accountant recommended taking this as a Directors Loan and repay in 9 months. Now my question is if I would have to repay the money, why not pay 25% tax and get to keep the money forever. I understand that when the company is closed we can get capital relief and get some money tax free. But even in that case it looks like you cant take much more than 25k tax free and the rest attracts 28% tax. So in effect higher than if i had just taken it as extra dividend. So why would people leave the reserve cash in the company account rather than make use of that money. (This is assuming I see my contract not ending anytime soon, thus wont need the buffer the extra reserve provides). Am I missing something. Any thoughts ?
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Because the majority of contractors should be eligible to claim entrepreneurs relief which lowers the CGT rate to 10%.But even in that case it looks like you cant take much more than 25k tax free and the rest attracts 28% tax. So in effect higher than if i had just taken it as extra dividend. So why would people leave the reserve cash in the company account rather than make use of that money. (This is assuming I see my contract not ending anytime soon, thus wont need the buffer the extra reserve provides). Am I missing something. Any thoughts ?
There is no £25k tax free amount - you may be confusing the limit before you need to formally liquidate the company which incurs additional cost (but normally well worth it if you have a lot of retained reserves).
Regarding the original point - higher rate dividends vs loan - then you are right. If you need the money for a temporary purpose then a loan (up to £10k to avoid the interest/BIK issue) repaid within 9 months of the company year end makes sense. But if you just want the money, then a director's loan doesn't really help you as it has to be repaid eventually. Sometimes you need to just face the fact that if you need some extra cash out of the company, you're going to have to pay the higher rate tax on the dividend. -
Is there a question in there?
The point of a Director's loan, when used in this way, is to defer/avoid higher rate tax, but many contractors will fail to achieve this in practice, because they need a higher-rate dividend to pay back the loan.
The point of taking the money later is to defer/avoid higher rate tax to a time when your income is lower. You're wrong about the CGT rate on the capital distribution if Entrepreneurs Relief applies (assuming you wind-up the company formally).
So, what is your question exactly? Or to put it differently, how can we possibly know what makes sense in your case?Comment
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As others have said - you've got to repay it, so how does it help you?
A colleague of mine bed and breakfasts his every year and repays with a dividend - I keep saying how daft that is, but once you start down that road, I can't see how you can ever repay it without taking a hit.Comment
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I think I read somewhere that blatent B&B is being clamped down on,Originally posted by TheFaQQer View Post
see this:
https://www.accountancylive.com/deal...-loan-accountsComment
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The rules were tightened and made more explicit; in short if the loan is under £15k and you have a gap of 30 days between repaying the loan and taking a new one then it isn't caught by the new rules. If it's over £15k then the number of days is irrelevant and HMRC will take a high level view of the arrangement and your intentions.Originally posted by Platypus View PostComment
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Yes, I have mentioned that in the past to himOriginally posted by Platypus View Post
How he thinks having a 50k loan and paying interest on it and then paying it back with a dividend each year makes sens, I cannot fathom.Comment
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My question was which would be the best way if I actually needed the money to be kept. As the 'TheCyclingProgrammer' said, the DL only helps if I need the money temporarily. If I need the money to be kept, I just need to take the extra tax hit. That makes sense to me. I got my answerOriginally posted by jamesbrown View PostIs there a question in there?
The point of a Director's loan, when used in this way, is to defer/avoid higher rate tax, but many contractors will fail to achieve this in practice, because they need a higher-rate dividend to pay back the loan.
The point of taking the money later is to defer/avoid higher rate tax to a time when your income is lower. You're wrong about the CGT rate on the capital distribution if Entrepreneurs Relief applies (assuming you wind-up the company formally).
So, what is your question exactly? Or to put it differently, how can we possibly know what makes sense in your case?
Thanks for all the responses.Comment
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I've never been a great fan of directors loans.
I've sat in seminars with eminent tax bods, "A tax deferred is a tax saved", and whilst that makes sense on paper, in practice my experience has been that unless there is something exceptional, eg feast this year with imminent famine next year, then it's better to take the tax hit, have a dividend,mand know where you are.
Sometimes simplicity isn't fashionable though.Comment
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