Directors Loans

[Nixon Williams]

In fact HMRC should be encouraging this. Say there are 100,000 small businesses with £10k in their bank account earning 0% interest. That's £1bn of dead money. If all that money was earning 4% interest and being taxed at 20% that's an additional £8 million for the exchequer.

But, if the bank is not paying you interest, it's profits will be higher, so the tax it will pay will be higher. Typically the bank will pay CT at a higher percentage, so the exchequer will be even better off!

[minstrel]

But, if the bank is not paying you interest, it's profits will be higher, so the tax it will pay will be higher. Typically the bank will pay CT at a higher percentage, so the exchequer will be even better off!

Good point Alan!

Although, I expect for the majority of contractors, any additional interest for their Ltd will be "higher rate" income and incur more tax that the standard 20% CT. E.g. it would be distibuted as additional dividends which would incur a 32.5% personal tax charge, which works out at around 40% total tax on the interest received by the company by the time it gets back to the individual contractor.

40% tax is higher than the 26%/25% CT the banks will probably be paying, so the exchequer will still normally be better off.

[GECK0]

I agree you need to do the sums and work out whether it is worth the effort.

However, a couple of years ago when I was paying a comparatively high mortgage rate, I was using this technique and saving myself a couple of thousand pounds per year.

All you really need to do is ensure your business bank account has a very low balance, always sweeping the remainder to your personal account, and log the transactions in a spreadsheet.

Well worth the effort in my book!

Im just wondering why its important to keep a low balance.?

I have just finished my first year, and I took out the income each month and spent / saved it. My expenses were high so I won't have too much to pay back when I do my accounts, but would it have made a difference if I had - say £10k remaining in my business bank?

I understand that I'll have 9 months to repay what I owe with the 4% and pay my corporation tax - so will it make a difference if I just let the money start to build up in my company account from my monthly income - as repayment or do I need to demonstrait a one off payment into my company bank account as a loan repayment?

Many thanks in advance for any help.

[minstrel]

Im just wondering why its important to keep a low balance.?

Normally if you keep money in a business bank account you don't earn much interest. If you keep £100k in your business bank account earning nothing, and you could earn 4% elsewhere you are losing £4k per year.

I have just finished my first year, and I took out the income each month and spent / saved it. My expenses were high so I won't have too much to pay back when I do my accounts, but would it have made a difference if I had - say £10k remaining in my business bank?

I understand that I'll have 9 months to repay what I owe with the 4% and pay my corporation tax - so will it make a difference if I just let the money start to build up in my company account from my monthly income - as repayment or do I need to demonstrait a one off payment into my company bank account as a loan repayment?

I'm not sure I understand what you are doing. You sound like you are just spending/saving whatever money you recieve in your business account and then paying back money at the end of the year when you do your accounts?

You need to be clear about what is your income and what is your company's income and not mix the two.

[northernladuk]

Im just wondering why its important to keep a low balance.?

I have just finished my first year, and I took out the income each month and spent / saved it. My expenses were high so I won't have too much to pay back when I do my accounts, but would it have made a difference if I had - say £10k remaining in my business bank?

I understand that I'll have 9 months to repay what I owe with the 4% and pay my corporation tax - so will it make a difference if I just let the money start to build up in my company account from my monthly income - as repayment or do I need to demonstrait a one off payment into my company bank account as a loan repayment?

Many thanks in advance for any help.

Remember dividends can only be taken from PROFIT. If you have been giving yourself money that should have been put aside for tax you could be in a lot of trouble. Also if you have been just giving yourself the money with the idea of giving it back by the end of the year so your books would have read what they did all along you are also in a lot of trouble.

Get an accountant.

[Wanderer]

But, if the bank is not paying you interest, it's profits will be higher, so the tax it will pay will be higher. Typically the bank will pay CT at a higher percentage, so the exchequer will be even better off!

Yeah, and we all know how much tax the banks pay on their profits.

[VirtualMonkey]

Very nice post.

WNLUKS

[THEPUMA]

A deed of trust is the way forward. Deposit the money into your personal bank account. Complete a deed of trust stating that you are doing so on behalf of the company. When you withdraw the money from the personal bank account, repay it, including interest, to the company.

Ideally deposit enough money that no tax is deducted at source otherwise it complicates your CT return somewhat.

Everyone's a winner.

PUMA

[northernladuk]

A deed of trust is the way forward. Deposit the money into your personal bank account. Complete a deed of trust stating that you are doing so on behalf of the company. When you withdraw the money from the personal bank account, repay it, including interest, to the company.

Ideally deposit enough money that no tax is deducted at source otherwise it complicates your CT return somewhat.

Everyone's a winner.

PUMA

You would need a solicitor to help with this at cost I take it? This hasn't been tested either? Isn't writing yourself a deed of trust to then give you the money? Isn't there a conflict of interest?

I remember you speaking about this awhile ago and was interested to know how it would work. Surely if it was this easy it would a) have been common knowledge now b) been abused to high heaven by now?

[rambaugh]

You would need a solicitor to help with this at cost I take it? This hasn't been tested either? Isn't writing yourself a deed of trust to then give you the money? Isn't there a conflict of interest?

I remember you speaking about this awhile ago and was interested to know how it would work. Surely if it was this easy it would a) have been common knowledge now b) been abused to high heaven by now?

One would probably need to make provision for funds to defend yourself in case HMRC investigated. Obviously using funds in this way offers a lot of reward (if you have a off-set mortgage) but also increases your risk of falling foul of HMRC.

Just an idea, but suppose an even higher risk option is to invest in an off-shore company/bank bond in a currency where you can find superior interest rates. There are a couple of places where you can AAA status countries where its possible to fetch upto 8% interest in blue chip company bonds.