There may be times when your company needs funds – for a purchase, or an investment, perhaps. Can you lend personal funds to your limited company, and how are interest payments treated for tax purposes?
Why would your limited company require a loan?
- You’re starting a new business, possibly with other directors, and you want to provide initial funding for the company.
- Your limited company is currently making a loss, and you want to inject some working capital into it.
- You want to buy some equipment or another type of asset via the company, and there aren’t currently sufficient funds to pay for the asset but will be in the future.
Is a director allowed to lend money to the limited company?
Yes, you can. In fact, this may be a preferable option compared to applying for a commercial loan from your bank.
Any loans are recorded in the company directors’ loan accounts. Similarly, if the company lends money to the directors, this is recorded in the same place, for accounting purposes.
In all cases, we recommend you create a loan agreement between the director(s) and the limited company – which are distinct legal entities. The agreement should detail the loan size, interest rate, term, and any other conditions. There is no obligation to do this, but it creates a paper trail which may prove useful in the future.
Although it is unlikely if you have used model formation documents, make sure that your Articles of Association don’t prevent loans being made from the company’s directors.
Can you charge interest on a loan to the company?
Yes, you can. As this would be an unsecured loan, you could charge a commercial rate of interest to the company. However, there are several things to bear in mind.
If you are running a fledgling business, you wouldn’t want to saddle the company with unreasonable interest payments, as this would have a detrimental effect on cashflow.
When you’re working out the repayment period for the loan, again you should consider how duration would affect the company’s cashflow. If it’s a new business, a longer terms may well be a more sensible option.
And, of course, you don’t need to charge any interest at all.
How are the interest payments treated for tax purposes?
For the limited company, the interest payments are treated like any other loan (such as one granted by a bank). These costs are tax-deductible against the company’s Corporation Tax bill.
If you do charge interest, the company needs to submit form CT61 to HMRC each quarter detailing the amount of interest charged.
The company must deduct 20% basic rate tax from the interest payments before it is paid to the director.
So, if the interest payable for the quarter is £100, the director will receive £80, and HMRC the other £20. If the director is a basic rate taxpayer, there will be no further tax to pay on this income.
If you are the director making the loan, you must include any interest you receive from the company on your annual self-assessment form.
Other things to consider when lending cash to your company
- If you make a director’s loan to your company, the amount will be included on the company’s balance sheet (as a creditor).
- Your company can repay a loan at any time, should the directors’ decide. The amount showing as a creditor on the balance sheet will be reduced until it is fully paid.
- If you want the company to repay (or part repay) a loan at any time, make sure there are sufficient funds in the company to meet its ongoing liabilities, such as tax.
- When considering any aspect of lending money to your company – and how you conduct transactions related to loans, don’t forget that limited company directors are obliged to always act in the best interests of the company.
Always ask your accountant if you are unsure about any aspects of lending money to your company (or if you want to borrow money from the company).