Company v bank loans?

March 1st 2024

If you need a loan and your company has available cash, is it more tax efficient to borrow from it instead of your bank?  Kenny Logan from our Edinburgh office discusses below.

Borrowing interest free cash from your company (that it doesn’t have to borrow to lend to you), instead of via a bank loan does appear attractive. But there are trade-offs, your company might lose the interest it would otherwise earn and there can be tax costs. On the first point, currently the interest your company can earn will be about half what you would pay if you took out a personal bank loan. That makes borrowing from your company a clear winner, but to what extent depends on the tax charges resulting from the borrowing.

Highly efficient small loans
If you only need to borrow for a short time, company borrowing is very tax efficient as there’s no tax charge for you or your company where the debt:

Is repaid within nine months and one day of the end of the accounting period in which it was provided; and in total that you don’t owe more than £10,000 to your company at any point during a tax year.

Total borrowing of up to £10,000 is tax free indefinitely for a company owner manager. However, the company must pay a temporary tax charge equal to 33.75% of any part of the debt that’s owing after nine months following the end of the accounting period in which the borrowing was made. The tax charge is repayable after the debt is cleared.

Borrowing money at the start of your company’s accounting period gives you and it a 21-month tax-free window. If the funds are borrowed at the end of the accounting period, the window is shorter. For example, if the loan was on the last day of an accounting period it would be only nine months.

Larger loans
While not as tax efficient and cost effective, larger loans are worth considering.

David is the director and 75% shareholder of Smiths. It prepares accounts to 31 March each year. On 6 April 2023 David borrowed £50,000. As long as he repays the loan by 1 January 2025, there will be no tax to pay. The loan is repaid on 31 December 2024. If David is a basic rate taxpayer, he will pay tax of £400 on the benefit in kind resulting from the loan. The loan is outstanding for 21 months, and the total cash equivalent value charged to tax is £1,969 (£50,000 @ 2.25% x 21/12), which at the basic rate of 20% is £394. Smiths must pay the Class 1A NI at 13.8% on the benefit, a total of £271.

The tax and NI cost to David and Smiths of the use of £50,000 for 21 months is £665 (£394 tax on benefit in kind and £271 Class 1A NI), which is equivalent to an annual interest rate of 0.76%. Smiths loses access to the money over the same period, but with current deposit interest rates typically at around 4.5% the arrangement is a win. In effect, David is extracting income from Smiths at a very low tax cost.

Borrowing up to £10,000 from your company is tax-free cash for up to 21 months. Larger loans can also be tax efficient. For example, the tax and NI cost of a £50,000 loan for 21 months is just £665. That’s equivalent to an annual interest rate of 0.76%. Loans for longer periods are still tax efficient despite a temporary tax charge payable by your company.

Our team would be happy to discuss this and similar related issues you may have, please contact us direct.

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