Withdrawing money lent TO limited

[Tarquin Farquhar]

PMFJI but isn't IR35 an issue in that, if the new contracting income stream is inside IR35, 95% of it will be deemed salary and will be due PAYE and NICs?

Yes, from a company point of view it can pay any money that it has to the OP as repayment on the loan. Yes, from a personal point of view the OP can receive repayment on the loan without tax being due. But wouldn't it be true that the IR35-caught income would not be treated as being the company's money to do what it wants with, it would be treated as deemed salary?

[malvolio]

The Director's Loan amouint is not income...

[Tarquin Farquhar]

The Director's Loan amouint is not income...

No, but what I mean is that the company can not pay it out of IR35-caught money, because that is deemed to be salary.

[ASB]

No, but what I mean is that the company can not pay it out of IR35-caught money, because that is deemed to be salary.

Of course it can. There is nothing that says itm ust be paid to the employee, only that that it is treated in a specific way for PAYE purposes.

Granted it's difficult to conceive of any situation where doing anything other than paying it to the employee is sensible.

[sal626]

Thanks for the replies all…meeting my accountant next week to discuss further, but had a 2 min chat with him.

From what I understand, the limited can invoice client, and money received will be “turnover”.
I have to pay CT on the gross profit,
and after that I can withdraw the money without any more tax due.

What I also need to clarify next week, is that if I take no salary (but company pays CT and I take loan repayments)…is IR35 still an issue? I.e. if I am not taking a salary, does it matter if I am in or out of IR35?

[malvolio]

I.e. if I am not taking a salary, does it matter if I am in or out of IR35?

Wrong way round. If you are caught by IR35 (and most people aren't, if they only knew it), 95% of whatever your gross income is is liable to taxation under PAYE/NICs, whether or not you pay yourself a salary.

[ASB]

IR35 of itself isn't significant. However if you are IR35 caught the only profit you will have available is 5% of turn over.

What is significant is that you have 65k of loan in the company which the company can pay you out of taxed income - with no further tax on your part.

Now, you can also withdraw taxed income - up to the point of about 40k (your basic rate allowance) with no further tax to pay. IF you don't use this allowance you lose it. So look at 2 possibility's:-

1) You make a profit of 70k. You pay 14k CT and transfer 56k to the balance sheet.

So now you have:-

Directors loan -65,000
Current year profit 56,000

Shareholders funds -9,000

So, you make a loan repayment of 56,000. Good, no more tax to pay

Now you have

Directors loan -9,000
Current year profit 0
Shareholders funds -9,000

This appears the same - well strictly only "sort of".

Next year your trading position is exactly the same

directors loan -9,000
profit 56,000
funds 47,000

So, you decide to pay the loan off AND pay a dividend of 47,000. This dividend takes you into HRtax so you have to pay approx 2,000 of it to HMRC.

Now start from Y1 again:-

Directors loan -65,000
Current year profit 56,000
Shareholders funds -9,000

So, you pay 40k dividend and 16k loan repayment. No more tax to pay. You now have:-

Directors loan -49,000
Current year profit 0
Shareholders funds -49,000

Year 2 come along. You repeat. So you pay 40k in dividends (no more tax) and 16k in loan. You are 2k better off and still have 36k of loan in the company going forward.

Of course whether or not this is effective depends upon your exact position - and that of the company since dividends can only be paid from profits. It could be that your balance sheet is such that dividends cannot be paid until the loan is repaid anyway - though that would depends on a number of factors.

The key thing is to extract taxed money in such a way as you use your tax allowances and only then should you start making loan repayments.

Also don't pay no salary. Ensure you are paying a salary equal to your tax free code in order to get a years pension credit and also use rather than lose your tax free allowance (ie don't pay 1200 more in tax than you need to).

So I'll come back to:-

If I were in the OP's position I would:-

1) Take dividends to ensure that the basic rate threshold was used by the recipients [without repaying the loan]
2) Use any funds that were available beyond this as loan repayments (thus drawing taxed income beyond this with no further personal income tax).