HMRC has made an unexpected decision: despite the base interest rate climbing to 5.25%, they have chosen to keep the official rate of interest (ORI) for director’s loans steady at 2.25%.
This departure from their usual practice of adjusting the ORI in line with changes in the Bank of England’s base rate has left directors and accounting experts confused.
What is a director’s loan?
When you or your close relatives borrow money from your own company, you are taking out a director’s loan. Managing these loans can trigger tax obligations for both you and your company. For loans surpassing £10,000, the company must treat it as a ‘benefit in kind’, and adjust Class 1 National Insurance accordingly. As the borrower, you might also face tax responsibilities based on the official interest rate, which must be declared in your personal tax return. Any difference between the interest you paid and the official rate could mean extra tax duties.
How does this affect me?
Directors often prefer dividends for their cash needs, but with a 2.25% official rate on interest, loans can have their advantages, especially since dividends over £500 are taxable. Borrowing from your company can be tax-efficient if the interest charged is at least 2.25%. However, it is crucial to repay the director’s loans within nine months and one day before the end of the corporation tax accounting period to avoid HMRC’s hefty additional tax charges of 33.75% or 32.5% for late repayment. Moreover, companies need to follow reporting requirements and grasp the tax implications of director’s loans to manage financial and tax duties effectively.
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