Financial Strategy

Does your company pay you interest on the funds you have lent it? If not, why not?

It is very common in the world of small and micro-businesses for the directors to lend money to their company to finance the start up phase, or once more established it could simply be that cash needs to be retained for future investment, or the directors have decided they would rather use their own resources for working capital than borrow from a bank.

Whatever the reason, this is unsecured lending and if your company fails, is at risk. There is also the opportunity cost; if you didn’t lend it to your company, you could use it to reduce your mortgage or treat your family to a holiday, so why give such a valuable facility for free?

Regardless of whether you agree with us on this, paying interest is often very tax efficient. Now do we have your attention?

From the company’s perspective:


Assuming the funds are required by the business for commercial purposes, the interest paid is a finance cost that reduces profitability and therefore exposure to Corporation Tax (currently 19%, 25% and 26.5%). To be allowable in this way the rate of interest needs to be commercial (an unbiased director would see that the terms of the loan are more favourable than traditional lenders and the funds are necessary for the business operations). When you consider the APR of unsecured lending, it is quite easy to achieve a strong rate.


The loan is likely to come without any specific terms or security requirements, and so can be more flexible and doesn’t need the authority of a bank’s credit team. The directors simply need to meet to discuss the loan arrangements and minute their decision.


The company must deduct basic rate (20%) tax at source and file a CT61 return to HMRC each quarter, to pay over this deduction (similar to PAYE/CIS). So, you need to consider the administrative burden of this.

From the director’s perspective:

Tax rates…

A basic rate taxpayer has a personal savings allowance of £1,000 per tax year, and a higher rate taxpayer, £500. With savings rates as they are, it is quite a challenge to earn £1,000 in bank interest so for many this allowance would be wasted. Interest over and above this annual allowance would be subject to normal income tax rates (currently 20%, 40% and 45%) but don’t forget that Corporation Tax has been saved, so for an owner managed business this should be offset. Even if profits are small and so subject to the lower rate of 19% you have drawn funds from your company at a net 1% tax rate. For those companies suffering the marginal rate of 26.5%, this is a real win-win.

Tax return…

The interest received is declared on the individual’s Tax Return, with the personal savings allowance applied and the tax suffered at source deducted from their liability.

Withdrawing funds…

If funds were not drawn from the company as interest, they would likely be drawn as salary (costing income tax and NIC) or dividend (dividend tax applied).

If on the other hand, the directors owe the company money, the situation is quite different and you should seek advice from an accountant to avoid any nasty penalties.


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