If you trade from a company you will be familiar with the concept of your director’s loan account, and you will probably also understand the frustration of either constantly going overdrawn on your loan account or having funds in the company that you can’t access without triggering a significant tax bill.
And if this isn’t a problem for you now, based on the law of averages it probably will be soon!
We are often asked, how can we extract more of the profits locked within the company without incurring a hefty tax bill?
We have a few creative solutions up our sleeves, but it’s always a good idea to start with the basic things you could and should be doing to relieve pressure on those all-important loan accounts.
Make sure you utilise all the shareholders’ basic rate tax bandsEvery year without fail – including spouses of directors. In 2020/21, every individual shareholder can receive £50,000 into their loan account at a tax cost of less than £2,700 – that’s a net, after-tax income of almost £95,000 for a couple. Yet it’s surprising how many companies don’t do this and the directors end up running out of loan account.
Reclaim business miles Any business miles travelled (excluding home to work) should be recorded and charged back to the company at the appropriate mileage rate. If you don’t do this, you are eroding your loan account at quite a rate unnecessarily.
SELECTING THE RIGHT MILEAGE RATE
This depends firstly on whether your car is owned privately or on the company. Business miles travelled should be recorded (excluding between home and work) and claimed, you can’t just claim a percentage as business (unlike a partnership).
|First 10,000 miles of the tax year||45 pence / mile|
|Any additional mileage||25 pence / mile|
Use the appropriate Advisory Fuel Rate for your car, available here: https://www.gov.uk/guidance/advisory-fuel-rates
Please note these are updated quarterly
Second carIf you have a second car, consider swapping this for a commercial vehicle such as a pickup. Commercial vehicles can be run tax efficiently on the company (including the fuel) which avoids these costs coming out of your loan account.
Personal gifts and welfare supportTypically these also come out of directors’ loan accounts which can have a significant impact in many cases. We have a tailor-made solution for this called the Welfare Trust which enables these payments to come out of the company but completely by-pass your loan account.
Utilise the children’s tax free allowancesSchool fees and children’s savings should not come out of your loan account. Again the Welfare Trust is a way of utilising those allowances and funding school fees straight out of the company – see our article to find out more.
Staff giftsThese should go through the company as a tax deductible expense (and if appropriate taxed through the payroll on the staff members concerned). Remember that outright non-cash gifts with a value of less than £50 are usually tax free for the staff member under the ‘trivial benefits’ rules.
Gifts to yourselfDon’t forget you can take advantage of the ‘trivial benefits’ rules as well! This is capped however at a total of £300 per tax year.
If you do any work from home, a flat rate of £4 per week can be charged to the company without any supporting evidence. Anything above this should be based on justifiable additional household costs incurred – not just a proportion of costs that would be incurred whether or not you work from home.
There you have it!
8 ways to reduce the impact on your loan account. If you are still needing more get in touch to discuss our solutions for extracting chunks of value at a very low tax cost.
(Disclaimer: This article is no substitute for professional advice)