Number-crunch looms for 'Ltds' planning loans

A hike at Budget 2016 in the tax charged on loans from limited companies to their participators means that the shareholders concerned may need to do so number-crunching, accountants say.

Without the hike, the participators (shareholders) would have an incentive to borrow money from the company rather than take dividends, says the Association of Tax Technicians (ATT).

In fact, except for short loans, companies could have paid less tax than via dividends by making a loan to HMRC of an amount equal to what would have been just 25% of the loan.

But under the Budget that rate will now increase to 32.5% (the same liability which higher rate dividend taxpayers will suffer), for loans made from April 6 2016, said ATT’s Michael Steed.

“The [chancellor’s] announcement maintains the alignment between the effective rate of tax on dividends and the loans to participators charge which is made on companies.

“In addition, where the shareholder was also a director, they would have an income tax liability on the beneficial loan, currently calculated at three per cent,” he said.

In practical terms, Steed says the likely upshot is that shareholders who want to spend what they withdraw without ever having to repay it will see dividends as better than a loan.

But by contrast, shareholders who will be in a position to make a full repayment may, he said, “still need to do the arithmetic to see whether a loan might be more advantageous.”

Closely held companies suffer a tax charge where they make loans to their shareholders and where those loans are not repaid within nine months of the end of the company’s year-end.

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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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