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Newsletter issue - January 09.
If you borrow funds from your own company or get it to pay personal bills on your behalf, there could be additional tax bills for both you and the company unless you repay that money to the company quickly.
Personal Tax
Where the amount you owe to the company exceeds £5,000 at any time in the tax year, and you have paid interest at less than the official rate on this loan there will be an income tax charge on you personally. The official rate has been set at 6.25% since 6 April 2007 in spite of the massive cuts in the Bank of England interest rates since then.
Corporate Tax
Where the loan is still outstanding nine months after the company's year end the company has to pay a tax charge equivalent to 25% of the loan, known as a 'section 419' charge. When the loan is eventually cleared this section 419 charge can be reclaimed by the company, but only when its next corporation tax bill is due.
What to do
If you do owe your company a significant amount you could either:
- Use other personal funds to reimburse the amount you owe; or
- Get the company to pay you a dividend or a bonus that is set again the loan to bring the amount you owe back to zero; or
- Ask the company to write-off the loan.
Implications
Option 1 creates no further tax charges for you or the company, so it's the best in that respect.
Option 2 generates more tax for you, particularly if you already pay higher rate tax. In that case you will have to pay 25% of the net dividend in tax but you won't have received a cash dividend to give you the funds to pay that tax. The company may have to pay you a higher dividend to give you enough cash to pay the higher rate tax due. The company must deduct PAYE and NICs from any bonus it pays, so can often be more expensive and it must have the cash to pay that tax and NI to the Taxman.
Option 3 the loan write-off, is treated as a distribution by the company at the date of the write-off. This is taxed as a dividend in your hands, complete with the 10% tax credit, but it is not actually a dividend. The company cannot claim a deduction against corporation tax for the amount of the loan written-off. The Taxman may also argue that national insurance contributions are due on the amount of the released loan, as if it was a payment of salary.
If you owe your company money please discuss the situation with us as soon as possible as the most tax efficient solution will vary depending on your circumstances.
