Borrowing money instead of paying higher tax rate

[Craig at Nixon Williams]

Thanks - so under 5k no interest to pay and no BIK?

Yes, that is correct.

You will need to pay it back before the company's year end in order to avoid incurring a S.455 surcharge however.

Craig

[Craig at Nixon Williams]

So you still have to pay 4% interest for under 5K ?

No, if it is under £5k then HMRC don't regard an interest free loan as a BIK and so there is no point in paying interest...

Craig

[Clare@InTouch]

Yes, that is correct.

You will need to pay it back before the company's year end in order to avoid incurring a S.455 surcharge however.

Craig

You can pay it back up to 9 months after the year end and incur no s.455 charge too.

[Podgy]

No, if it is under £5k then HMRC don't regard an interest free loan as a BIK and so there is no point in paying interest...

Craig

Thanks - I was getting confused with the other posts.

[Craig at Nixon Williams]

can we not simply do these year on year and continuously "cheat" the system.... Or is it something we could do as a one off?

On the issue of taking a series of loans year on year….

Aside from the bed and breakfasting issue, my opinion (for what it's worth) is that if your lifestyle demands that your income is more than the HR threshold each year then the loans that you take in order to defer tax are going to get larger each year and at some point you are going to need to either repay the loan or take a massive dividend in a single year and therefore pay tax on it.

Say you need to take £5k more than the HR threshold each year (and assuming that the HR threshold remains the same each year) – first year you take a loan for £5k, second year you need another £5k so the total loan is £10k and this continues year on year.

At least if you take the dividend now, you know what the tax treatment of dividends is – if you take a few years of loans and clear it with a dividend the tax treatment of dividends may be different at that point to what it is now.

Hope this makes sense!

Craig

[northernladuk]

Have a look at the below search. We have had a couple of people over the years asking about doing this type of thing over a year end, from the few I read, there isn't a golden bullet. Unless you are going to really reduce your outgoings you are just robbing Peter to pay Paul as you will be that amount down next year and possible need and even bigger loan etc ??

https://www.google.co.uk/search?q=bo...nting-legal%2F

IMO don't use the next tax bracket as a scarey hard stop. If you want to spend the money pay the tax on it and spend it rather than getting in to complex a potentially messy situations. IMO we earn this level of money to be comfortable in life using a loophole that is much more tax efficient than a permie. To worry about and use the next level as a hard stop just adds to the worry and problems which wasn't the point of what we do. All IMO of course.

[TheFaQQer]

Another gotcha to watch out for, as I was reminded by my accountant this week:

Keep in mind this is the total value of money you owe the company, so if you take a loan of £5,000 and then overpay your wages by £2 then the loan is £5,002 and becomes taxable

[NorthWestPerm2Contr]

Have a look at the below search. We have had a couple of people over the years asking about doing this type of thing over a year end, from the few I read, there isn't a golden bullet. Unless you are going to really reduce your outgoings you are just robbing Peter to pay Paul as you will be that amount down next year and possible need and even bigger loan etc ??

https://www.google.co.uk/search?q=bo...nting-legal%2F

IMO don't use the next tax bracket as a scarey hard stop. If you want to spend the money pay the tax on it and spend it rather than getting in to complex a potentially messy situations. IMO we earn this level of money to be comfortable in life using a loophole that is much more tax efficient than a permie. To worry about and use the next level as a hard stop just adds to the worry and problems which wasn't the point of what we do. All IMO of course.

I agree with this, and it makes obvious sense. However, there may be a temporary reason to do this e.g. Buying a house, doing work on a house, investment etc. The costs/spending can then be brought down and the initial borrowing taken down over a number of years......

[Craig at Nixon Williams]

I agree with this, and it makes obvious sense. However, there may be a temporary reason to do this e.g. Buying a house, doing work on a house, investment etc. The costs/spending can then be brought down and the initial borrowing taken down over a number of years......

There can be good reasons for doing it - the 4% may be cheaper than other personal loans, in which case it makes perfect sense to do this. If it is just so that you can maintain your normal lifestyle then it's not worth it.

The S.455 surcharge isn't a permanent thing because when the loan is eventually repaid to the company you can reclaim the surcharge - though whilst it is outstanding and HMRC have hold of the surcharge it can make a significant dent on company cashflow.

Craig

[northernladuk]

I agree with this, and it makes obvious sense. However, there may be a temporary reason to do this e.g. Buying a house, doing work on a house, investment etc. The costs/spending can then be brought down and the initial borrowing taken down over a number of years......

Very true but I am sure this is the standard opening line of people that up to their necks in trouble as well. Self discipline and a grasp of reality is needed. A couple of months on the bench next year can turn a little tax fudge into a huge problem. Just be careful.