Millward, May & Co - Wokingham Accountants
Wokingham Accountants

Director Loan Interest

CT61 Form

Should I charge my company interest on a director loan?

Sometimes a director has to lend a company money either at the start of setting up a business or for a specific purpose at a later date. This could be a significant amount of money especially if the business is purchasing something like a property. It could be tax efficient for the director to charge the company interest on this loan as:

  • Any interest charged on the loan is corporation tax deductible (currently 19%)

  • Interest forms part of the directors total income for self-assessment but it could be more tax efficient than taking a dividend, especially if the interest allowances (£1k for basic rate and £500 for higher rate) have not been fully utilised by the director.


Example

Let’s say a director lends her company £50,000 where the normal commercial interest rate for a loan of this size and risk is 2% per annum.

The company would record £1,000 of interest in the annual accounts (£50,000 x 2%). This is a tax deductible expense, saving the company £190 (£1,000 x 19%). The director would record £1,000 of interest on her personal tax return. She would not pay any tax on this if she were a basic rate taxpayer and received no other interest in the personal tax year.

In this example, this is a tax efficient way of extracting £1,000 from the company. Every situation will vary so it is important to discuss this with your accountant first.


How do I charge interest on a director loan?

  1. Ensure that the loan is for an allowable purpose. If the director is lending money to the business but there is no need for this money (i.e. it already has plenty of cash or does not need the extra funds) then it is unlikely that this is allowable.

  2. Decide on the interest rate you will charge on the loan. This can be a “commercial” rate of interest, which would depend on the amount of the loan and the risk attached to the loan. I would advise looking at the rates that banks charge for a similar loan and then base it around this figure. If the figure is too high then HMRC could challenge it further down the line.

  3. Apply to submit CT61 forms. You have to request this online but HMRC will send you a paper form - yes they are still in the dark ages on this one! www.tax.service.gov.uk/shortforms/form/CT61.

  4. You will need to pay interest and complete a CT61 form on a quarterly basis. Your company will be required to deduct basic rate tax (20%) from the interest before paying this over to the director. This tax will need to be paid to HMRC on a quarterly basis. In the example above therefore, each quarter:

  • The company would pay HMRC £50 (£1,000 / 4 x 20%)

  • The company would pay the director £200 (£1,000 / 4 x 80%)

  • The director can claim back the £50 in tax when she comes to complete her self-assessment tax return if she has not used her interest allowance.


Further guidance on how to complete your CT61 form can be found here.