HMRC have recently confirmed that the official rate of interest for ‘beneficial loan arrangements’ continues to be frozen at 2.25% for the 24/25 tax year.
On face value this may seem a rather unremarkable announcement, but this is actually very helpful for company director/shareholders who have an overdrawn loan account.
In very general terms, interest free or low interest loans provided by a company to a director or employee can give rise to a taxable benefit in kind (subject to the value of the loan exceeding the £10,000 threshold).
If the loan exceeds the de-minimis threshold, then interest at the official rate should be charged to eliminate the benefit. Compared to the current base rate (5.25%) and commercial borrowing rates, the official rate of interest is very favourable.
Some clients have taken advantage of this to meet personal expenditure (like personal tax payments) or to reinvest into personal investments. One example is taking a personal director loan, then putting that money into a tax-free wrapper like an ISA to achieve a better than 2.25% rate of return.
Individuals do need to be mindful that there are other taxes in play as well as just the Income Tax on any benefit in kind. There could be employer NIC (Class 1A) on the loan, plus the interest charged on the loan represents taxable company income. Loans made to participators by close companies that are outstanding at year end also fall within the ambit of the s455 withholding tax charge.
At outset, an individual looking to take advantage of the low rate of interest in this way would be well advised to ensure there is a plan for the repayment of the loan. Simply writing off an overdrawn director loan has negative NIC and Income Tax consequences (taxed as a quasi-dividend) and there is specific legalisation (s321A, Corporation Act 2009) that denies Corporation Tax relief for the effective loss to the company.
Speed read:
HMRC have confirmed the official rate of interest for beneficial loans is still frozen at 2.25%, comparatively low compared to any commercial borrowing arrangements.
This means director shareholders can still take advantage of loans of company cash at a modest interest rate, with the caveat that (as ever) it is vitally important to get professional tax advice tailored to your specific circumstances before taking any loan from your company.
