30 January 2015    |    Taxation, Payroll

Company loan: a tax saving tip

A company loan?  A tax-saving tip

The personal tax cost of borrowing from your company is now quite low. However, when the time comes to repay the loan there’s a neat trick you can use to cut it further. What is it and how does it work?

First, the current rules

Example: John borrows £100,000 from his company and pays interest of 2% on the loan.  The notional interest he would be due to pay is £3,250. John actually pays £2,000 interest, so the net benefit in kind for the year is £1,250 which requires to be reported on a P11d form.

Taxable benefit out the taxable Benefit in Kind.

As you probably know, if you borrow from your company you can be taxed on a benefit in kind (BiK). However, relatively small loans are exempt. Only where the balance owed exceeds £10,000 at any point during a tax year does the charge apply.

Calculating the tax

Benefit in kind - p11d on loanHMRC’s standard method of working out the tax payable starts with taking an average balance for the tax year and applying its official interest rate, now 3.25% per annum.

This is done by adding together and dividing by two the balances at the beginning of the tax year, or when the loan commenced if that’s later, and the end of the tax year, or when the loan ended.

Because the balance is taken to be the greatest amount owing on the days in question it can result in more tax being due than you might otherwise expect.

Pay off the balance

Using the same facts as in the example above, and assuming John cleared his loan account in March 2016, the Benefit in Kind calculated under HMRC’s standard method is time-apportioned to relate just to the months where there’s a balance on his loan account. The table shows how HMRC would work the taxable Benefit in Kind.

[table]

Balance at 6/4/2015,”£50,000″

Balance 6/3/20016 (paid off),nil

Average balance,”£50,000″

“Taxable BiK £50,000 x 11/12 x 3.25%”,”£1,489″

[/table]

AN AVERAGE TAX SAVING

If, instead, John had not repaid the loan in full, but left just a small amount outstanding, the taxable Benefit in Kind using HMRC’s standard method would be calculated like this:

[table]

Balance at 6/4/2015,”£50,000″

Balance 6/3/2016 (paid off),£200
Average balance,”£25,100″
“Taxable BiK £25,100 x 3.25%”,£815

[/table]
Tip. If you intend to repay a loan from your company leave a small balance outstanding until after the year has ended. By doing this, the Benefit in Kind is reduced. What’s more, as long as the balance you leave doesn’t exceed £10,000, it won’t by itself count as a Benefit in Kind in the year following that in which you repay most of the loan.

HMRC override

The bad news is that HMRC can override the standard method of calculation and instead work out the Benefit in Kind based on an average of the real balance of the loan on each day.

This will usually result in losing the tax advantage. However, it’s difficult for HMRC to spot, and even if it does, it’s rare that it will bother to attack the arrangement, so there’s a good chance our tax-saving tip will work.

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