Hi there,

I've got a question i hope one of you can answer.

I've got a ltd company, and ive taken the max dividends for this tax year before entering the higher rate tax band.

Is this a legal way around it? Id rather not take out a loan (of which the interest would be less than the tax), so could i legitimately, borrow the money from my limited company account, and add interest? E.g. take ?,000 and add an interest of ?0, pay it back, totalling payback of ?,010. Or could i borrow the money with no need for interest?

Thanks in advance,

Ash
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Generally you cannot borrow more than ?K without it getting complicated.

If you have surplus cash there may well be workarounds, but I would suggest you get expert advice from your accountant. There are as many traps are there are tricks.
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Two consequences to borrowing money from the company. (We'll ignore the fact that it may be illegal under the Companies Acts!)

Firstly, if the amount that you borrow exceeds ?k, then you will be charged a benefit in kind, subject to income tax. This is worked out by applying the official rate of interest (currently 6.25%) to the loan. You'll pay tax at your normal tax rate and the company will pay Class 1A NIC at 12.8%

If you do go over ?k, the whole amount is charged, not the excess.

Tip: If you need to take more than ?k, and have two shareholders/directors (for example self and wife) split the loans between the two of you.

Second, if the debt is outstanding nine months after the end of the accounts year, the company will pay corporation tax equat to one quarter of the loans outstanding. This can be reclaimed when the loans are repaid.

Speak to your accountant
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Just as a thought, if you are so determined not to pay the higher rate of tax, why bother to earn the money?
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Just as a thought, if you are so determined not to pay the higher rate of tax, why bother to earn the money?

Thanks for clarifying it may be illegal, glad i asked :) though i had a feeling it would.

I'm very careful with my money, i would rather wait until the following tax year, where the lower rate of tax applies, than pay the higher tax rate for this year. I'm not sure how your 'bothering' comment has any effect on my question, the money is there for the taking, i was just wondering if i could save myself some cash thats all....

Sounds like a lot of complications, which looks like its in my better interest to go into the higher tax band,

Thanks,

Ash
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I made the comment because some people seem so keen not to pay 40% tax that they perhaps lose sight of what should be the real objective - to maximise after tax income. I have one client who lived by this rule and now has so much cash in the company that there is a risk that they will lose the trading company status for inheritance tax and capital gains tax.

The other factor is that if you take dividends over the 40% limit, your additional tax will be 25% of the net dividends that you receive, not 40%. This is the difference between the two rates, as the normal tax on the dividends is covered by the company's CT, which is paid in any event. (Please don't ask to explain why it's 25%. I didn't dream up the system!)

Don't worry too much about the illegal comment - it is against the Companies Acts, but almost everybody does it at some time or another. It's not a criminal offence and the only parties who are likely to complain are the shareholders or a liquidator.
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THanks for explaining, just read my response back, and sounded a bit rude! wasn't meant to sound like that.

I'm a bit confused. Are you saying that it isn't as easy as simply taking a dividend of the profits from say year 1 in say year 3 of company trading?

Could you explain how inheritance and capital gains comes into this equation, i can't get my head around it....

Thanks,
Ash
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I think what he was saying was that his client was so keen not to pay any tax that he left all the money in the company, the effect of which was that it became harder to define the company as a "company" and not a "piggy bank" consequently its treatment for inheritance purposes or in a sale was much more draconian. ie his little savings of tax over time cost him a lot more in tax in the long run.
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I think what he was saying was that his client was so keen not to pay any tax that he left all the money in the company, the effect of which was that it became harder to define the company as a "company" and not a "piggy bank" consequently its treatment for inheritance purposes or in a sale was much more draconian. ie his little savings of tax over time cost him a lot more in tax in the long run.

oh!! im a bit braindead this morning.... forgive me....

Thanks for explaining,

Ash
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