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Director’s Loan Maintained at 2.25% Interest Rate

Published by UK Property Accountants
Published Date: April 15, 2024

The HMRC has decided to maintain the official rate of interest (ORI) for director’s loan at 2.25%, an unexpected move given the increase in base interest to 5.25%. This decision comes as a surprise to many directors and accountancy experts as the official rate of interest had been previously adjusted to the changes in the base rate made by the Bank of England (BoE).

What is Director’s Loan?

If you or your close relatives borrow money from your own company, it is called Director’s Loan. Depending on how the loan is managed, both you and your company might have to pay taxes.

Experts are unable to pinpoint why the interest rate has been maintained at 2.25% against the base rate of 5.25% maintained by the BoE.

If you have borrowed more than £10,000 from your company, the company is required to treat it as a ‘benefit in kind’ and deduct the Class 1 National Insurance accordingly. You might be liable to pay tax on the loan at the official interest rate and declare the loan in your personal self-assessment tax return.

Director's Loan

If the interest you paid is below the official rate, the company must record it as the company’s income and report it on a personal self-assessment tax return. If there is a difference between the official rate of interest and the rate you paid, you may have to pay tax on that difference.

Benefits and Considerations of Tax Implications

The directors are most likely to opt for dividends when in need of cash. However, they may benefit from opting for loans instead of dividends, especially as dividends are subject to taxation if the amount exceeds £500.

The main benefit of borrowing money from your company is that you might not have to pay any additional tax if the company charges an interest rate of at least 2.25%.

A tax expert details how any director or employee can benefit from the 2.25% rate if they are taking a ‘cheap’ loan.

A major thing to consider when opting for the director’s loan, however, is that it needs to be repaid within nine months and one day before the end of the corporation tax accounting period. The HMRC can charge an additional tax of 33.75% or 32.5% for late repayment.

Also, the company needs to follow the reporting requirements of the director’s loan and understand the tax implications to manage its finance and tax liabilities properly.

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