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:
2017/18 | |
| Personal allowance: this is the amount of income an individual can earn in a tax year before paying tax. | £11,500 |
| 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. | £1,000 |
| 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. | £5,000 |
| Dividend allowance: individuals won’t pay tax on the first £5,000 of dividends they receive in the tax year. | £5,000 |
| TOTAL | £22,500 |
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.
If you would like to discuss this further please do not hesitate to contact our tax department.
Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.
