Lending money to your limited company, rather than giving money as start-up capital in return for shares, makes a lot of sense for a shareholding director.

If, for example, you’re starting up a company with two fellow directors and you were all putting in £10,000 each for opening fund of £30,000, the best way to do it to issue 3 shares of £1 and then have three separate loan agreements between the company and its individual shareholders.

When your company starts making money, the company can pay each of the directors their £10,000 back without any tax liability and without affecting your annual personal tax allowance.

Lending money to your limited company – can I charge interest to my company?

You should probably not charge interest to your company for capital introduced as a loan if it’s a new-start. It’ll need to hang on to all the cash it can during the choppy waters of the first 12-24 months’ trading.

If you do want to charge interest to your business, you can do so at any rate you desire – even a Wonga-style interest rate if you want. We’ll leave you to decide on the wisdom of that 😊 but here are the tax implications.

If you’re a basic rate taxpayer, you have an annual personal savings allowance of £1,000 – that’s money you can receive in interest without being taxed on it during the year. For higher rate taxpayers, the allowance is £500. There is no allowance for additional rate taxpayers.

It’s not a huge amount but it’s better than nothing. Any income you receive that takes you into a different tax band however would be taxed at the relevant levels.

If you lend your company £20,000 over 2 years at an interest rate of 9.3%, you would receive over the course of the year £997.40 in interest, all tax-free if you’re a basic rate taxpayer.

Any interest, even amounts underneath the threshold, must be reported on your Self Assessment.

For your company, the interest counts as a business expense and can be deducted from profit in full to lower your corporation tax.

Lending money to your limited company – what sort of repayment period would you recommend?

We certainly understand your desire to get paid back as quickly as possible on money you lend to your company.

For an answer to that question, you need to go back to your business plan. If, with our example company, the three directors wanted to be paid back their combined £30,000 in the first year, that’s a £2,500 monthly fixed cost for the business.

Think about it this way. By month 9, you and your fellow directors will have taken back £22,500 in loan repayments. Had you only taken back half, your business would have had the benefit of hanging onto £11,250 more in cash.

Could that £11,250 have been used to grow the business or provide it with a cash back-stop if you’ve had a rough few months?

Look again at your cashflow forecast. Subtract 15% from your sales month on month. What repayment could your business comfortably afford to make back to you and the other directors during harsher trading times when cash is scarcer than predicted?

Think like a bank about this question. Banks are just as interested in getting a return of money as well as a return on money. What level of repayment is likely to protect the ongoing survival of your business?

Lending money to your limited company – any other things to consider?

If the amount of cash you’re introducing is significant and there are other shareholding directors in the business who are not matching your capital, you may wish to draw an agreement up granting you a larger shareholding of the business.

The reason for this is that, if you sell the company, you might be missing out on a huge return. Traditionally, when a business is taken over, all debts to directors are settled. If it was your capital that made the business grow, you would get your loan amount back but because your shareholding remained the same, you wouldn’t get a higher payout than the other director because you did not increase your shareholding as a condition of introducing the money.

On the other hand, money tied up in share capital is a whole different world of pain and paperwork to extract and if you never sell the business, getting it back would be harder than getting back a straight loan.

Lending money to your limited company – talk to Burton Beavan

This can be quite a fiddly area of both taxation and the health of the relationship between you and your fellow shareholding directors. Please call us on 01606 333 900 or email us at hello@burtonbeavan.co.uk to run through the options.