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If your not paying back the Directors Loan your company will not pay Corp tax
Even this statement is incorrect. What the company does with the profits makes no difference. If the company makes a profit and leaves it in the account instead of repaying the loan it still has to pay CT on the profit made.
E.g. Company makes £100k profit after deductions
Corp tax is £19k. The remaining £81k can be kept in the company, used for further expansion or used to pay down the directors loan. Whichever way you choose it the £19k CT gets paid first.
I agree Thank you
I find the only true way to extract profits from a Company is Via a SIPP Thats Tax free 100%
Learn Change and Adapt ?????
All comments are for casual information purposes only. If you wish to rely on any advice I have given please ensure you obtain independent specialist advice from a third party. No liability is accepted for comments made.
Sorry Joe but this is not correct. It's the same as if you have a repayment mortgage, only the interest portion is deductible as a tax expense, the capital part is paid from profits. As you say, if the company pays you interest on the loan then that is deductible but then you have declare it as income, so works out worse.
I agree the equity is in effect money you are loaning the company but in order to repay this loan then the company must make a profit. If the company makes a profit it pays tax.
I stand corrected and offer an abject apology.
Its easy to be mis informed on this topic
The Red herring is Directors loans when repaid are Tax free
But the caveat is the Company Pays Tax
I really look forward to your blogg on how to extract profits from a company when a Landlord is a 40% Tax payer
every way I stack this topic I pay more tax then I would have when I invested in my own name
A company is a great place to building wealth But the sting in the tale is how you remove the profits once they are in there
No problem YoungJoe. Tax is pain for everyone and we all look for ways to minimise where we can.
DlL, I agree, SIPP or SSAS is a superb way of reducing tax. It was you that turned me on to this as I had been putting it off whilst concentrating on business but I now utilise whatever allowance the government gives me. My wife is also a director of some of my companies so I am lucky enough to be able to also pay £40k into her SIPP
My understanding is that if the company owes you money on a directors loan account then the repayment of this from the company to you is tax free.
You can also charge the company interest on the loan however interstest paid to you will be classed as income for tax purposes.
Your right a Director can charge interest which is taxable
But If the company repays the Directors Loan from profits The Company Pays Corporation tax
Or the company can fund a SIPP where there is not tax payable for Director or Pension
But I would Imagin a lot will not use a SIPP
There are tax reliefs on the income from interest.
A good teacher must know the rules; a good pupil, the exceptions.
Martin H. Fischer
I can see why this causes confusion, and granted, this can be looked at in different ways.
Looking at this simplistically…..
If we take an example of a property purchased for £100k within a newly formed limited company.
If this was funded 100% by cash injected by the Director, then the company accounts would show an Asset of £100k being the investment property, and a Liability of £100k owed to the Director (i.e the Director’s Loan Account).
If this was funded via a 25% deposit in cash injected by the Director (rest being a mortgage), then the company accounts would show an Asset of £100k being the investment property, and a Liability of £25k owed to the Director (i.e the Director’s Loan Account), and a £75k Liability owed to the mortgage lender.
Those accounting entries above will form part of the company’s Balance Sheet.
The Director’s Loan Account can be repaid to the Director at any time free of income tax and NI, however, as mentioned, there needs to be bank funds to achieve this!
We mentioned the Balance Sheet, but the other side of things is the Profit and Loss Account in the company accounts.
Once the above mentioned company starts letting the property, the Director will naturally be aiming to generate a profit. This profit from letting is exposed to corporation tax. However, these letting activities generating a profit are what will increase the bank balance, and thus, allow the Director to start repaying its Director’s Loan Account.
Of course, there are differences to the above too. For instance, going back to the example above, if the Director introduces £100k in cash to the company, but only purchases a property for £50k, then the Balance Sheet would show a Asset of £50k being the investment property, an Asset of £50k being the company bank account, and £100k being the Director’s Loan Account.
There are many variables to this!
As DL mentions, there can be other ways to reduce the profit exposed to corporation tax, and one such way under right circumstances is indeed a pension.
Profits are chargeable to corporation tax within the limited company, and so the questions are really, how much profit do you need to withdraw for yourself, and then what is the best way of withdrawing these, and then when is the best time to withdraw these. The Director’s Loan Account is just one consideration when considering withdrawals.
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