Withdrawals from a company

My daughter has just found a house she'd like to buy and I would like to lend her £25k for her deposit. I am the sole director and shareholder of a company, and I am a higher rate tax payer. Can you give me a summary of the options I have for withdrawing the £25k from the company?

1st May 2011

You have three main options:
1 Dividend
Assuming the company has sufficient reserves, you could declare a dividend. Don't forget, as you are a higher rate tax payer, the net dividend should be big enough to cover your eventual, additional tax bill.
2 Director's loan account
Assuming you do not have a director's loan account in credit that you can draw on, any withdrawals you make from the company are a loan and will therefore trigger a tax charge. This is calculated as 25% of the balance of the loan at the end of the accounting period- however, HMRC will repay it as you pay the loan back.
As the loan is in excess of £5,000, a benefit in kind will also be triggered. Using the current average rate of interest, the benefit would be 4% of the loan balance. Upon this, the company will pay employer's national insurance (NI) at 13.8% and you will pay income tax at 40%. Again, ensure your withdrawal is large enough to cover the NI and income tax.
3 Bonus
If you take it as a bonus, you will pay income tax on it at 40%, the company will pay employer's NI at 13.8% and you will pay NI at 2%. Again, ensure your withdrawal is large enough to cover the NI and tax. However, the company will receive tax relief on the gross bonus and the employer's NI.
Cashflow must also be considered. Whilst drawing on the director's loan account is likely to cost the least initially, unless you repay the loan, it will continue to have the tax charge, income tax and NI implications year-on-year. Therefore, in the long run, it could be the most expensive option if the overdraft is not cleared.
There are various calculations required and lots of things to consider when making a decision on withdrawing money from a company, and therefore, it would be advisable to seek professional advice from your local TaxAssist Accountant.

By Jo Nockels

Disclaimer: The information provided is based on current guidance (at date of publication) from HMRC and may be subject to change. Any advice shared here is intended to inform rather than advise. Taxpayer's circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this information, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.

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