A tax saving that’s sure to be of interest

A change introduced in the 2015/16 tax year means you can draw a further £5,000 from your company tax free. This could also result in a minimum tax saving of £1,000 for your company.

So carry on reading if you want to discover how you could make those savings...

Well, from the 2015/16 tax year you can earn up to £5,000 in savings income (broadly speaking interest received) without paying tax on it.

We think George introduced this new rule to keep the 'grey voters' happy, though you don't have to be a pensioner (or grey haired) to take advantage of it.

How will it work for me?

Well, if you're a director and make a loan to your company, you can charge it interest and provided certain conditions are met the company will obtain Corporation Tax relief on interest paid to you. We've already discussed those conditions in our earlier blog 'Can you claim a tax deduction on an unpaid interest charge?'.

As long as the rate of interest is reasonable (broadly this means comparable with commercial lenders) and is formally documented, it should be accepted by HMRC.

OK let's give you an example so you can see how this works in practice.

Penny has savings of £50,000. Her company wants to take out a bank loan from Sheldon Finance Ltd to buy some scientific equipment. If Penny makes a loan to her company instead, her company Howard Ltd can save £1,000 a year if it agrees to pay her £5,000 in interest per year. She  also reduces the dividend she draws from the company by £5,000.

We've compared the position with the previous tax year before the 0% savings rate was introduced:

There's also a few points worth mentioning:

  • Salary is paid at the maximum level in order to reclaim employers NIC
  • The figures of dividends shown are inclusive of the 10% tax credit and are paid with the aim of avoiding higher rate tax.
  • Howard Ltd pays Penny net of tax. Penny reclaims the tax deducted via her Self Assessment tax return.
  • The company saves £1,000 which is 20% of the interest paid of £1,000.

We'd stress that in order for the company to obtain tax relief on the interest charged the monies it borrows from you must be used for a qualifying purpose.

You may also decide to take out a loan personally, because the rate is better than the one offered to your company by the same lender. So you could charge your company interest for the money you lend and claim tax relief on the interest you pay to the lender.

Be aware though, that there are plenty of traps set by the taxman, so if you don't follow the rules you could come unstuck. If you have any questions on this or any other tax matters, drop me an email at richard@thefriendlyaccountants.co.uk or phone me on 01202 048696

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