Is writing off a directors loan a tax efficient option ?
Your accountant has probably told you that if you borrow money from your company, you will be taxed at 2.5% of the average balance of the debt and no tax if the money owed didn’t exceed £10,000 in the tax year.
A modest charge you may think BUT the company must pay a HIGHER PRICE; a tax equal to 32.5% of what you owed at the end of its financial year which isn’t repaid in the next 9 months and applies to ANY amount owed no matter how small.
Avoiding the 32.5% tax charge
The tax charge can be avoided if you repay what you owe your company within the 9 months allowed by HMRC.
Naturally you’ll have to find the money for this and if it comes from your company you’ll have to pay tax and possibly NI contributions before you can use the net amount to repay the debt... as an example assuming you are a higher rate tax payer (40%) and you owe your company £10, 000, you’ll need an extra £17,241 gross pay to have enough left to settle what you owe.
Loan write- off
If you are a shareholder in your company as well as a director, you’ll pay tax at a lower rate compared to salary.
As a higher rate tax payer you’ll pay 32.5% (compared to 40%) but your company will need to pay you more money so you pay the tax but it’s better for cash flow.
A potentially significant drawback to a “write off” is NI. HMRC view is that “normally” a loan write off counts as earnings for NI purposes. Therefore factoring in NI would mean this would be less tax efficient than salary.
HMRC view is no doubt correct for directors who aren’t shareholders but is questionable if they are. Its argument relies on a write off being “remuneration or profit derived form an employment”. Therefore, if you can show that it was because of your position as a shareholder then NI won’t apply. However proving your case can be tough as HMRC usually play hard ball on these.
A simpler way to achieve the same tax efficiency and cash flow advantage as a write off is for the company to pay a dividend sufficient to cover the debt but of course the director will then pay dividend income tax at their marginal rate of 7.5%, 32.5% or 38.1%. This is still more advantageous than salary and NI.
There are other ways to ensure you can achieve higher tax efficiencies and better cash flow – contact us for more details