As a director who is borrowing money from your company, it is imperative that you fully understanding how to treat the interest charged on the loans.
Loaning money from the company can be a useful bonus, but there are two tax charges which can apply when you lend money to a director (if they have 5% or more of the company’s ordinary share capital).
There is a temporary charge on the company and a permanent tax on the director who borrowed the money.
Where a director pays interest it can reduce or eliminate the tax they have to pay, but this has no effect on the tax due by the company.
To eliminate a tax charge on the director any loans should be shown separately in the company’s records and the debit is made to the account which is sufficiently in credit to cover the interest.
The interest on the loan which must match that which HMRC require to cancel the tax charge must be paid no later than 6 months after the end of the tax year (this will allow the company to work out how much interest is required to cancel the tax charge).
There also needs to be an agreement in writing between the lender and the borrower stating that interest is due, otherwise a payment isn’t interest in law and so can’t reduce the tax charge.