Using directors loan as cash advance for unpaid salary to reduce corporation tax? Using directors loan as cash advance for unpaid salary to reduce corporation tax?
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  1. #1

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    Default Using directors loan as cash advance for unpaid salary to reduce corporation tax?

    Hello guys
    I made a beginner's mistake! Didn't realise that my ltd company financial year comes to the end today, it's only my first year of operation most of which company was dormant anyway. I thought i had time till end of March and still had time to soet things out! During first months I never paid myself any salary and lived off my savings just using the business account for expenses. Now I have circa 20k sitting in my business account, will it all be treated as profit for the corporation tax?
    I thought of using a temporary directors loan while I get an accountant and set up payroll, max 1 month. As if cash advance towards unpaid salary. But will it reduce the taxed profits? I'm at a loss
    Yes I know I'm a noob :-/

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    Your accountant when you get one should be able to sort it all out for you.

    There's nothing to stop you declaring a dividend today (if you're sure about your profit!). Or making a booking of salary into your the employee account in your accounting software (or book). Do that, and it doesn't matter if the actual salary payment is made after year end.

    You can even do this in retrospect... but best do it today.
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    Just for research purposes. Why did you not get an accountant at the beginning?
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    Quote Originally Posted by northernladuk View Post
    Just for research purposes. Why did you not get an accountant at the beginning?
    I had a few health issues and postponed it

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    Always read all the threads before trying to be helpful, Phil.

  6. #6

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    Hi AlexKol

    As you probably know you've got a few misconceptions going on there. The following is just my general advice. I am not an accountant or a lawyer and you should seek professional advice immediately. I'm deliberately removing a few details here because you can't rely on advice from random strangers, though my intentions are good :-)

    First up, neither a dividend or director's loan would reduce your profits liable to CT. Director's Loans can be a minefield and you need to tread very carefully. For a start you can easily incur a benefit in kind liable to a type of national insurance, if the amount exceeds a threshold which I think is currently £10k (though you could pay your company interest above a certain rate to avoid that), and if any amount of DL remains outstanding a certain period after the company's year end, there's an additional tax charge payable with your CT, currently 32.5%. (that's a company rather than a personal liability though, and it's reclaimable when the loan is repaid. Google 'S455 loans to participators'.

    Salary payments would do though, and I think that in theory you could make a single large salary / bonus payment today. But these payments would (a) be subject to both personal income tax and employee's national insurance deducted from the amount paid, (b) might affect your personal tax situation adversely if you've not planned for it, perhaps pushing you into a higher rate bracket (c) incur liability for the company to pay employer's national insurance on the amount paid, and (d), crucially, need to be reported via RTI *before* they were made. If you don't have already have a payroll scheme set up with HMRC and software that can do the RTI submission, I think that route is closed to you today.

    [ STOP PRESS actually it might not be closed to you. Assuming you don't already have a PAYE reference, you might be able to apply for one here: https://www.gov.uk/register-employer . Then you could in theory pay yourself salary (subject to all the liabilities I just mentioned, remember) today and this would reduce your company's profits liable to CT. If you did that, you'd need to make an RTI / FPS submission within 30 days and according to https://www.gov.uk/guidance/what-hap...mation-on-time you wouldn't get an RTI penalty. ]

    other than that -

    Any expenses incurred wholly and exclusively for legitimate trading purposes should be deductible from your profits for CT purposes though. So if you were, say, needing to buying an expensive laptop, today *might* be the best day to do it - but don't fall into the trap of thinking of it as free money out of your CT as I've seen some people do. For example, say your profit at the end of the year (which probably isn't the same as the cash in your bank account, but that's a nother story) is £20k. Do nothing, you have a CT liability of (say) 20%, £4000, due in a few months. You buy a tricked-out MBP for £4k. Now your profits liable to CT are £16k which means you will have to pay £3200 CT. You've "saved" £800 not £4000. And usually, the amounts involved are much smaller, so while you need to record all your spending properly, don't nickel-and-dime things in an effort to make things look like legitimate expenses - it's not worth the aggro in the long run.

    One other thing I'll mention is, in case you're not aware of it, (even though it's not really to do with your question) the new dividend tax means you'll probably soon begin to incur income tax liabilities in excess of £1k. In the first tax year when that happens, you'll have to pay not just the liabilty for the year you're doing a tax return for, but also "payments on account" for the following year! So if for example you had income tax to pay of £3000 in a given 31st January tax return deadline, and you weren't already in the POA regime - you'd have to pay another 50% alongside it, and another 50% again by 31st July. (so a total of £4,500 now and £1,500 in July) The following January you'd have to pay any balancing amounts, and POAs for the next year. It's a minefield but it can really mess up your personal cashflow if you've not prepared for it.

    Now the usual answer to anything here is "what does your accountant say", and though I've tried to give you some pointers here, if any of this stuff is news to you, you're not going to be able to cope without an accountant. Even if you were able to, most people save more than the cost of an accountant by using one, so get that sorted ASAP.

    Good luck!

  7. #7

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    Rather than rush this through now, why don't you lengthen your accounting period by a few months and find an accountant in the meantime?

    Start here https://www.gov.uk/change-your-companys-year-end and then go to companies house and see if you can file the change now.
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  8. #8

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    Quote Originally Posted by TheFaQQer View Post
    Rather than rush this through now, why don't you lengthen your accounting period by a few months and find an accountant in the meantime?

    Start here https://www.gov.uk/change-your-companys-year-end and then go to companies house and see if you can file the change now.
    Done! If I only knew it was this simple
    Getting an acct tomorrow. Thank you!

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