As a director shareholder, borrowing cash from your company can trigger tax charges for both you and it. To avoid these a colleague has suggested that it’s more tax efficient to obtain a company credit card and use that instead. Is she correct?
Company loan
Borrowing cash from your company can be a tax-free way to take cash. Tax charges only apply if:
- the total you borrow exceeds £10,000 at any point in a tax year and you aren’t required to pay interest on the debt at HMRC’s official rate (2.25% for 2024/25) or higher; or
- the debt isn’t fully repaid within nine months following the end of the company’s accounting period in which you borrowed the money.
In the first instance the loan counts as a taxable benefit in kind on which you’ll pay tax and your company will pay Class 1A NI. In the second instance your company will be liable to a corporation tax charge, although this is refundable nine months after the end of the accounting period in which the debt is repaid.
Avoidable tax
As long as you keep your borrowing within the £10,000 threshold and repay it within the nine-month deadline you’ll avoid any tax charges.
Example 1. Mark is the majority shareholder and a director of Acom Ltd. The company prepares its annual accounts to 30 September. In April 2024 he undertakes some home improvements and borrows money (£8,000) interest free from Acom, to fund these. He has no other borrowing from Acom. Mark makes loan repayments periodically so that by the end of June 2025, i.e. within the nine-month deadline, the debt has been cleared and no personal or company tax charges arise.
Example 2. The circumstances are the same as those in our first example except that Mark borrows another £6,000 in June 2024. This takes his loan over the £10,000 threshold which causes the entire borrowing of £14,000, not just the excess over £10,000, to be a taxable loan for benefit in kind purposes. Mark can still prevent Acom having to face a tax charge if he repays the £14,000 by the deadline.
Alternative borrowing
If Acom provides Mark with a company credit card not only would this make his life easier when he has to buy goods or services for the business but he can also use the card to make private purchases. What’s more, he can use the card to prevent the tax charge which occurred in our second example.
Example 3. The circumstances are the same as in our second example except that instead of borrowing the £6,000 in June 2024 Mark pays for the home improvements with his company credit card. This doesn’t count as borrowing (unless Acom makes it a condition of providing the card that the cost of private purchases must be reimbursed) meaning that the £10,000 threshold isn’t exceeded. The £8,000 he borrowed in April is tax free.
Tip. The £6,000 private card purchase will count as a taxable benefit in kind unless Mark makes good the cost to Acom, i.e. reimburses it, by 6 July 2025. As it was Mark’s plan to repay the whole debt to Acom by the end of June 2025 this shouldn’t pose any difficulty.
Using a company credit card to pay for private purchases doesn’t count as borrowing from your company. A card can therefore be used as an alternative to borrowing cash. As long as you reimburse the company for the cost of any purchases by the 6 July following the end of the tax year in which they are made, no tax charge arises.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.