If you run a company, chances are, at some time you will need access to finance – loans, overdrafts, or other forms of borrowing. You may also have to pay ongoing changes for banking, hiring a car, or buying a car through the business.
Here, we look at how finance costs are treated for tax purposes, and which typical expense can be offset against your company’s Corporation Tax bill.
As with all types of business expenses, only costs incurred entirely for business purposes are tax-deductible.
Typical finance costs for limited companies
Typical costs include:
- Monthly business bank account ‘service fees’ – charged by most high street banks.
- Overdraft fees.
- Interest charged on business bank loans.
- Interest charged on business credit cards.
- Interest charged on hire purchase agreements.
- Costs related to finance (such as Islamic loans).
Which finance costs are not tax-deductible?
- You cannot claim for any personal finance costs.
- All finance agreements must be in the company name (see below).
- You cannot claim for the capital repayment element of a business loan.
What about the costs of buying a company car?
There are many things to consider when working out the tax cost of buying or leasing a company car, however, in simple terms:
Your company can claim back the interest costs of car leasing agreements. However, if you lease a car with CO2 emissions of 110g/km, there is a 15% flat rate disallowance on the tax-deductible amount.
If you take out a loan to buy a company car, only the interest payments are allowable business expenses. The tax treatment of the car itself is dealt with via a system of capital allowances – which will reduce the company’s tax bill.
Your finances must be in the company name
Importantly, as a limited company owner, you must have a separate bank account for your business. The company is s separate legal entity to its directors and shareholders.
All business bank accounts must be in the company name. Take a look at our banking comparison table if you feel you are paying too much with your current supplier.
Similarly, all other finance agreements must also be in the company’s name for related costs to qualify as tax-deductible expenses.
What if you lend your company money?
What about if you lend your limited company money? This may be preferable to taking out a loan from a bank, and as it would be an unsecured loan, you would be justified in charging a robust interest charge.
There are a few things you need to bear in mind.
- The interest paid by the company is an allowable expense.
- The company must pay you the interest owed, less income tax at the basic rate (20%).
- The company has to report and pay the income tax liability each quarter, using form CT61.
- And, don’t forget, you will need to include any interest received on your personal Self Assessment form.
- You, or your accountant, should create a formal agreement to document the size of the loan and interest rate.
Find out more in our complete guide to lending money to your company.
What if your company lends you money?
If your company lends you money, as a business owner, this is known as a director’s loan.
How the loan is treated depends on a number of things, including:
- The amount of the loan – if it is over £10,000, it may be taxed as a ‘benefit in kind’ for the director.
- When the loan is repaid – if it remains unpaid nine months after the company’s year-end, an S455 32.5% Corporation Tax charge will be levied.
So, what about any interest charged by the company on the director’s loan? How is this treated?
The company can charge the official interest rate of 2.25% on the loan to the director, another amount, or no interest at all. The official rate changes from time-to-time. You can view the prevailing rate here.
However, a business loan clearly benefits a director personally, so if you don’t charge interest on the loan, then you will face a benefit-in-kind charge equal to the official rate, plus an additional 13.8% National Insurance charge on the amount of the interest.
We recommend you talk to your accountant before taking on any kind of finance arrangement, as the tax treatment of many loans (and purchases) can be complex.