Graeme Bennett from Forbes Young explains the recent changes to directors’ loan rules.
Another welcome tax break for director/shareholders is the doubling of the amount which they can borrow from their company without a benefit in kind (BiK) tax charge being triggered. As from 6 April this year a BiK arises where you owe your company more than £10,000 at any time during a tax year (previously it had a ceiling of £5k).
As from 6th April 2014 any loan to a director from their company above £10,000 is a benefit in kind and taxed accordingly i.e. subject to personal income tax AND National Insurance.
The loan can run and run if the director wishes, but if it is not repaid within 9 months of the company year end (and that includes loans under £10,000), then there will be a charge of 25% of the outstanding loan payable to the HMRC as additional corporation tax. This additional C.T. is not repaid by them until 9 months after the end of the accounting year in which it is repaid. Note that if you repay a loan of £10,000 or more to your company and re-borrow it within 30 days, a tax charge equal to 25% of the amount borrowed will apply.
It doesn’t matter if the loans are not documented – they simply are loans by virtue of the fact they are not salary or dividends.
It is therefore far more tax effective (and a lot less messy) if funds are drawn from the company as salary and/or dividends. All expenditure incurred by the company must be for the company’s business purposes. Any private expenditure incurred by the directors or employees on items such as general shopping, petrol, holidays, non-business travel, children’s school fees etc. are not items of business expenditure and are subject to tax and National Insurance as Benefits in Kind as well as being subject to Corporation Tax as explained above.
The above should be borne in mind when directors submit their P11d (deadline 19 July each year).