If you take a loan from your company and you pay no interest on it (or it is lower than HMRC’s official interest rates), you may have to pay personal tax on the benefit of having a interest-free/ low-interest loan.
There are a few instances when you could avoid a tax charge, but the main one to take note of is that the balance on your loan should not have exceeded £10,000 at any point during the tax year.
If it has exceeded £10,000 at any point, a tax charge will arise. The only way to avoid or reduce the tax charge, is to pay the company interest at HMRC’s official interest rates. This can be done retrospectively, provided it’s paid within the normal time limits for claiming a tax refund (normally 4 years).
In addition to your personal tax charge, the company may also be hit with a corporation tax charge of 32.5% of the balance on the loan at the end of the accounting period. Although this corporation tax charge is refundable as the loan is repaid, it is a very effective deterrent to stop companies from loaning to their directors.
Please note, we have assumed that your director’s loan account was nil at the beginning of the year.
If you would like any advice regarding your director's remuneration package or benefits in kind, please contact your local TaxAssist Accountant who would be happy to help.