My mate says I can charge my company interest on the money I’ve lent to it
Currently you can personally receive up to £1,000 tax-free interest each tax year. This limit is reduced to £500 for a higher rate taxpayer and nil for an additional rate taxpayer. This means that any interest you receive, such as bank interest, may not be taxable if it is within the above thresholds each tax year.
If you lend your company money on a commercial basis, you can charge interest and potentially not pay any tax on this income.
The interest charged to your company must be on a commercial rate (market rate) and the loan must be used for trade purposes, not investment. For example, the loan couldn’t be used for the company to purchase investment properties.
It is recommended that an official loan agreement is drawn up between you and your company. The loan agreement needs to set out the terms of the loan, repayment details and interest rates.
For a basic rate taxpayer to utilise their full £1,000 tax free allowance, they would need to loan their company a reasonable amount of money for the commercial loan interest to reach £1,000.
For example: A loan of £33,334 X 3% interest rate = £1,000 interest
There is administration involved with this, you will need to declare interest paid by the company on several forms each year.
If you would like to discuss how we can assist you with this, please give us a call on 01908 219 100 or email us at firstname.lastname@example.org.
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