Taken a loan from your company? How to pay it back for optimal tax-efficiency.
If you have taken a director’s loan, you will need to clear it to avoid your company facing a tax sizable bill if there’s money still owing when its financial year ends. After the end of the financial year in which the loan got repaid, HMRC will refund any tax. But clear it within nine months and the tax charge – which is equal to a whopping 32.5% of what remains – can actually be avoided.
Assuming your own resources won’t cover it, what are the repayment options?
The company can declare a dividend which, instead of paying to you, it uses to clear your loan. But it can only do this if it has sufficient profits – at least up to the amount of the dividend.
Or, could you clear what you owe if your company pays you extra salary? Yes, but PAYE tax and NIC liabilities will be triggered, leaving just the remaining net amount for repaying the loan. So, with no PAYE or NI to find, a dividend is likely to be far less costly than going down this route.
What about writing off the debt completely? Writing off a loan is taxed in the same way as a dividend but, unlike a dividend, the company does not need to have sufficient profits in order to do this. A point to note, is that writing off a debt can trigger NI liabilities, although these can be avoided if you received the loan in your role as a shareholder (not as director/employee). Any NI payable would still be less than if you used the extra salary option, though.
To sum up, then, the most tax-efficient way to clear a loan owing to your company is by declaring a dividend; alternatively, by writing it off. As always, if you are in this situation, give the experts at Figurit a call so you have all the facts and ramifications of each action in front of you before you make a decision.
For help with business or personal tax planning, call Figurit (formerly known as Lansdell & Rose) on 020 7376 933 or complete the form below.