Tax planning – interest payments made by a company

If your company owes you money you can use your company to make interest payments to you, this could be an effective tax planning strategy for the following reasons:

• The company will get corporation tax relief of up to 25% on the value of the interest payment made.
• If the interest payment falls within an individual’s starting rate band, it will be taxable at 0%.
• In addition, the individual could also use their interest nil rate band of £1,000 or £500 where the interest will be taxed at 0%.

A starting rate band is the first £5,000 an individual earns outside of their personal allowance (£12,570) and it only applies to interest income. So, if an individual had a salary over £17,570, they would not have any starting rate band remaining. If the starting rate band is combined with the interest nil rate band, a company can make up to £6,000 of interest payments to an individual without them incurring a personal tax charge. The saving to the company would be £1,500 (£6,000 x 25%). It is also worth noting that unlike salary payments, interest payments are not subject to employers or employees national insurance contributions. If there is more than one person who the interest payments are being made to, this could create a larger corporation tax saving.

Reporting the Interest Payment to HMRC

If a company say makes an interest payment to a director with a loan account in credit, it will need to complete and file a CT61 with HMRC. This form details the interest payments made each quarter and the form will need to be filed with HMRC 14 days after the end of the applicable quarter end. In addition, the company will be required to pay tax at 20% on the gross value of the payment made within 14 days as well. For example, on a gross payment of £1,000, a payment of £200 will need to be made to HMRC. The individual will enter the gross amount and tax paid on their tax return. If the totals fall within their starting rate band, it would mean the tax deducted at source will be repayable.

The above is just a basic summary of this area of tax planning and there are other factors that will impact this planning (e.g. the individual is in receipt of other interest income sources).

If you have any further questions regarding this article and how it may work for you, please contact Joe Wilson on 023 8046 1237 or email Joe Wilson.