Interest on Loans to your Business – Inspire
If you have made a loan to your business you should consider paying interest on the loan, as this will be an allowable deduction against the business profits. However, the interest will be taxable on the lender, so you need to consider the tax rate applicable to both parties.
For example, if the company pays tax at 20% and the director/shareholder pays tax at 40% this would clearly not make sense! If the loan is made to a company, the company will normally also need to deduct 20% tax at source and pay this to HMRC quarterly.If the lender only has a small amount of other income, such as a small salary or pension below £10,000, the first £2,880 of savings income is only taxed at 10%. Next year, however, the first £5,000 of savings income will be tax free which will provide a planning opportunity for some, as shown by the example:
Mr Wonger needs £100,000 to expand his sole trader business. His wife has just inherited a similar amount from her mother and decides to loan it to her husband’s business at 5% per annum. Her only other income is a small salary of £10,000 a year from her husband’s business. The £5,000 interest would potentially save up to 45% income tax plus national insurance for Mr Wonger, whereas Mrs Wonger would receive £5,000 interest tax free.