Borrowing money instead of paying higher tax rate

[NorthWestPerm2Contr]

The need has yet to arise but I am just planning/thinking ahead (as all contractors should do).

If I come to say Feb and have maxed out my allowance and Mrs NWP2C and I don't want to pay the higher tax rate, is it 1) legitimate and 2) the best way to avoid paying additional tax unnecessarily (i.e. tax efficient). As I can imagine paying a small % over 2 months is a lot cheaper than paying the additional 20% tax.....

And if 1) and 2) then 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?

thanks!

[TheFaQQer]

Director's loan of up to £5k, and make sure it's paid back within 9 months of your company year end.

4% interest charge to avoid the BIK, so you're looking at £16.67 a month for each £5k loan, rather than paying tax on taking it out as a dividend.

I've just borrowed from myco as a bridging loan in case my mortgage offer falls through this weekend.

[Clare@InTouch]

There are the BIK implications above, which aren't massive, but you have to be careful of the Section 455 CT charge. A loan must be paid back within 9 months of the company year end, and if it's not the company will pay an additional 25% CT on the balance. That extra CT is then repaid to the company (on application to HMRC) when you repay the loan to the company.

If you're taking out a loan, repaying it before the additional CT charge kicks in, then taking a loan again, there's a good chance HMRC will see it as "bed & breakfasting" and just deem it to be one continuous loan and tax it as such.

[Podgy]

Director's loan of up to £5k, and make sure it's paid back within 9 months of your company year end.

4% interest charge to avoid the BIK, so you're looking at £16.67 a month for each £5k loan, rather than paying tax on taking it out as a dividend.

I've just borrowed from myco as a bridging loan in case my mortgage offer falls through this weekend.

Only 5K - is that it?? surely there must be room to borrow more?

[NorthWestPerm2Contr]

Director's loan of up to £5k, and make sure it's paid back within 9 months of your company year end.

4% interest charge to avoid the BIK, so you're looking at £16.67 a month for each £5k loan, rather than paying tax on taking it out as a dividend.

I've just borrowed from myco as a bridging loan in case my mortgage offer falls through this weekend.

so if year end for me is April then I could borrow in Feb and pay back in say May? Also is the 4% calculated? is it 4/12 per month? Trying to understand the pros and cons. Also what if you wanted to borrow say 10 or 15k?

[Craig at Nixon Williams]

Only 5K - is that it?? surely there must be room to borrow more?

£5k is the amount that you can borrow without the loan being assessed as a benefit in kind. You can take more but you will need to pay interest on the loan or tax and employers NIC on the benefit in kind value if no interest is paid.

Craig

[Clare@InTouch]

so if year end for me is April then I could borrow in Feb and pay back in say May? Also is the 4% calculated? is it 4/12 per month? Trying to understand the pros and cons. Also what if you wanted to borrow say 10 or 15k?

It's 4% per annum, apportioned if outstanding for less time.

You can borrow any amount you like, you simply have to pay the benefit in kind.

The tax-free limit is increasing to £10,000 soon.

[TheFaQQer]

so if year end for me is April then I could borrow in Feb and pay back in say May? Also is the 4% calculated? is it 4/12 per month? Trying to understand the pros and cons. Also what if you wanted to borrow say 10 or 15k?

If you borrow 5k in February, and year end is April, then as long as you pay 4% for the period of the loan and repay it before the end of January, then there would be nothing else to pay.

If you want to borrow more than 5k, then you can do it and declare it as a BIK.

Are there any other directors that could also borrow money?

[Podgy]

£5k is the amount that you can borrow without the loan being assessed as a benefit in kind. You can take more but you will need to pay interest on the loan or tax and employers NIC on the benefit in kind value if no interest is paid.

Craig

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

[Podgy]

If you borrow 5k in February, and year end is April, then as long as you pay 4% for the period of the loan and repay it before the end of January, then there would be nothing else to pay.

If you want to borrow more than 5k, then you can do it and declare it as a BIK.

Are there any other directors that could also borrow money?

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