7 ways of extracting value from your loan account without paying more tax.

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. 

I am often asked, how can we extract more of the profits locked within the company without incurring a hefty tax bill?

I have a few creative solutions up my 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, before looking into further, more advanced profit extraction options.  

Here are 7 things you should be doing:

Utilise all the shareholders’ basic rate tax bandsMake sure you utilise all the shareholders’ basic rate tax bands. Every year without fail – including spouses of directors. In 2024/25, every individual shareholder can receive £50,270 into their loan account at a tax cost of less than £3,300 if the income is structured correctly - that's a net, after-tax income of just over £94,000 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 milesAny 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).
Private Car
First 10,000 miles of the tax year 45 pence / mile
Any additional mileage 25 pence / mile
Company Car
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.  Depending on your circumstances there may be options available to make these payments whilst not impacting your loan account – please speak to us to find out more.

Utilise the children’s tax free allowances if you canDepending on your situation, there may be options available to be able to structure your affairs in such a way where children’s life needs can be supported without reducing your loan account, alongside estate and succession planning – please speak to us to find out more.

Staff gifts These 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. It is important to note that the benefit ceases to be trivial if it becomes a regular occurrence. The £300 limit per annum for directors is a useful guide as to the number of times it would be expected for this benefit to be used for staff members as well.

Gifts to yourself Don’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 for directors.

Book a free discovery call today with a consultant to see which options will work in your specific situation

There you have it!
7 ways to reduce the impact on your loan account.  If you are still needing more contact info@oldfieldadvisory.com or call 02476673160 to discuss our solutions for extracting chunks of value at a very low tax cost.

Please note: This article is provided for information only and was correct as at time of writing (11/03/24). Any lists and details provided above are not exhaustive and are not intended to be full and complete guidance.  No action should be taken without consulting detailed legislation or seeking independent professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this article can be accepted.