Tax Efficiency and the Directors Loan Account
The various tax allowances available to individuals in 2017/18 mean that it is possible for directors with a substantial credit on their director’s loan account to extract up to £22,500 out of the company and incur no personal tax. This table illustrates how it works:
|Personal allowance: this is the amount of income an individual can earn in a tax year before paying tax.
|Personal savings allowance: a basic rate taxpayer can receive interest of up to £1,000 on which they pay 0% tax. This is in addition to the ISA allowances.
|Starting rate for savings: if an individual’s other income (excluding interest and dividends) is below £16,500 then they will also qualify for the starting rate for savings. The maximum available starting rate is £5,000. Every £1 of other income above your Personal Allowance reduces your starting rate for savings by £1.
|Dividend allowance: individuals won’t pay tax on the first £5,000 of dividends they receive in the tax year.
This shows the benefit of savings income as a component of an owner manager’s remuneration from the company.
It is important that interest is charged at a commercial rate; for example, if the company has a loan from the director of £60,000 and the commercial rate of interest is 10% then £6,000 interest would be payable to the director. Any amount of interest which HMRC considers to be in excess of a commercial rate may be treated as either salary or a dividend.
Although banks and building societies no longer have to deduct interest from investors, companies currently still have to. If the company makes payments of interest to a director, basic rate tax (20%) must be deducted and paid to HMRC. A corresponding return, known as a CT61, must also be submitted.
Please note that your personal circumstances should be considered with your tax advisor before implementing this remuneration.
Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.