Potential benefits from directors’ loans

Even though the rate of interest charged by HMRC on late tax payments is currently 6.75%, the rate charged on a beneficial loan for 2023/24 is much lower at 2.25%. Therefore, taking a company loan could be an attractive option for directors.

There will be no taxable benefit for 2023/24 if a director’s beneficial loans do not exceed £10,000 at any point throughout the year.

Company charge

The tax treatment of a director’s loan is complicated because there is also a company tax charge if the director is (very basically) also a shareholder and their company is a close company. For owner-managed companies, this will generally be the case.

• The tax charge is at the rate of 33.75% on the amount of loan should the loan still be outstanding nine months and a day after the end of the company’s accounting period in which the loan is made.
• However, this tax charge is refunded to the company if the loan is subsequently repaid by the director.

An opportunity

Given that high street banks are currently offering one-year fixed rate ISAs with an interest rate of around 4.2%, opportunistic directors could therefore:

• Take a £20,000 interest-free loan from their company;
• Invest this for one year, receiving tax-free interest of £840; and
• Repay the £20,000 company loan.

Depending on the timing and the company’s accounting period, there might not be a tax charge on the company. Even if the tax charge is payable, it will be repaid once the company loan is refunded. The director will have a taxable benefit of £20,000 at 2.25% = £450 (pro-rata according to the days outstanding during the tax year). Even for an additional rate taxpayer, the tax cost will just be a little over £200.

The downside will be the various reporting requirements for both director and company. Guidance is advisable.

HMRC guidance on director's loans can be found here.

If you would like to discuss this in more detail please do not hesitate to contact us.