Interest rate on money loaned to Company

[hugebrain]

Hi,

I loaned lots of money to my company over the last few years to keep it ticking over while I was feeling too ill to do much contract work.

Now I’ve recovered a bit and the company has made some money I think it should pay me a commercial rate of interest for the loan.

How would I find out how much to charge? Or is there too much admin work to make it worth doing?

I guess paying 25% tax on the interest would be cheaper than paying money out as salary or dividends, but maybe not enough to make much difference.

Hugebrain

[WTFH]

Hi,

I loaned lots of money to my company over the last few years to keep it ticking over while I was feeling too ill to do much contract work.

Now I’ve recovered a bit and the company has made some money I think it should pay me a commercial rate of interest for the loan.

How would I find out how much to charge? Or is there too much admin work to make it worth doing?

I guess paying 25% tax on the interest would be cheaper than paying money out as salary or dividends, but maybe not enough to make much difference.

Hugebrain

What rate of interest did you agree at the time you first loaned the money?
How did your accountant record it on the annual returns?
Why does this feel like there’s another story which you’re not telling us?

[hugebrain]

What rate of interest did you agree at the time you first loaned the money?
How did your accountant record it on the annual returns?
Why does this feel like there’s another story which you’re not telling us?

it’s more that I spent the money on company stuff so it now owes me it back. I agreed to pay a commercial rate of interest, because that’s what the rules say, but I don’t know what the definition of a commercial rate is or if there is a website you can use to look it up like you do with exchange rates. My accountant is doing my annual return now, hence I was asking.

Maybe Libor and a bit? The accountant isn’t sure if it’s worth the bother.

I read something about Mrs. Sunak that said you could get in trouble if you didn’t pay interest in this situation, but I don’t know why.

[WTFH]

it’s more that I spent the money on company stuff so it now owes me it back. I agreed to pay a commercial rate of interest, because that’s what the rules say, but I don’t know what the definition of a commercial rate is or if there is a website you can use to look it up like you do with exchange rates. My accountant is doing my annual return now, hence I was asking.

Over how many years have you been doing this?

[hobnob]

it’s more that I spent the money on company stuff so it now owes me it back. I agreed to pay a commercial rate of interest, because that’s what the rules say, but I don’t know what the definition of a commercial rate is or if there is a website you can use to look it up like you do with exchange rates.

Having a director loan for ongoing costs is totally fine - I've done the same thing myself, e.g. when I was on an inside contract but MyCo still had to pay accountancy fees etc. However, I've never charged interest to the company.

If I (or my company) took out a bank loan, I'd expect to agree the interest rate upfront. If the lender said that there would be an unspecified amount of interest, and they'd figure it out later, that's into loan shark territory!

I read something about Mrs. Sunak that said you could get in trouble if you didn’t pay interest in this situation, but I don’t know why.

The HMRC website says "If you charge interest [..]"
Director's loans: If you lend your company money - GOV.UK (www.gov.uk)
That implies that it's ok not to charge interest.

[northernladuk]

I guess paying 25% tax on the interest would be cheaper than paying money out as salary or dividends, but maybe not enough to make much difference.

Hugebrain

That's the deciding factor. Work out how much the loan is and over how long. If it's significant it could be worth persuing. If it's not then just leave it. Gather your data and do some sums and look at the reality of the situation which should help drive your decision. I would take a guess that if you've leant enough just to keep it ticking over it's likely to fall in to the not really worth it catagory.

[Lance]

charging interest is more about company loan to director. So you aren't taking a benefit in kind.
It's not mandatory either way.

As for tax... if the company has had the money for more than a year then interest would mean that the company accounts were inaccurate as the interest (and the loan) should be on the creditors list. But if your accountant has advised you to not bother then I'd just not bother.

[ladymuck]

I don't think there is an official definition of a commercial loan rate. I suspect it generally means one that isn't at 'mates rates' level or otherwise going to cause some kind of benefit (basically what Lance is talking about).

Considering this income will have to go on your SATR, is it worth charging your company for?

In hindsight, if you were always intending for your company to pay interest on the loan, then you should have decided and documented the rate (e.g. a fixed rate or variable at base rate + x%) and then set up a means to calculate the interest daily and create a periodic (monthly, quarterly, annual at worst) journal to show the interest charged each period.

Doing it years later is essentially landing your company with a liability that it never knew it had coming.