If you take out a personal loan to purchase equipment you use for your work, you may be entitled to a tax deduction for the interest. How can you turn this into an NI saving for you and your company?
Tax-deductible costs
If you incur costs in doing your job which aren’t reimbursed to you by your company you can claim a corresponding tax deduction provided the expenses are incurred “wholly, exclusively and necessarily in the performance of the duties” of your employment. A similar rule applies to the cost of equipment you use in your job. If you have to borrow to make the purchase and incur interest, neither of the rules mentioned entitle you to a tax deduction for it. Instead, there’s another rule with conditions that must be met before you can claim tax relief.
When is interest tax deductible?
A tax deduction for interest is allowed where the following conditions are met:
- the interest must be in respect of a loan. Interest on hire purchase or similar arrangements also qualifies. Trap. Credit card and overdraft interest doesn’t qualify
- the loan must be used for the purchase of equipment used, at least partly, for your job; and
- the equipment must qualify for capital allowances (CAs).
Tip. Unlike the rule for job expenses there’s no requirement for the equipment to be used “exclusively” for your job. Instead, the amount of tax deduction you can claim must be apportioned between job-related and non-job-related use of the equipment. For example, if you purchase a laptop on finance and use it 75% of the time for your work, you can claim a tax deduction for 75% of the cost as a CA plus the same percentage of the interest you pay on the finance.
What equipment qualifies?
Equipment qualifying for CAs can be anything from a chair for your home office to a computer, but some types of equipment are specifically excluded.
Trap. CAs can’t be claimed for cars or bicycles used for your work because tax relief is instead allowed by claiming HMRC’s approved mileage rates. Consequently, a tax deduction can’t be claimed for interest paid on loans etc. to buy cars and bicycles.
Saving tax and NI
Rather than personally claiming a tax deduction for loan etc. interest you can improve the NI efficiency by getting your company to reimburse you the tax-deductible amount. This could save you and your company up to 22.9% of the amount involved.
Trap. Getting your company to pay the interest must not be part of a salary sacrifice arrangement or it won’t achieve any NI efficiency.
Example. Ajay pays a firm to convert a room in his home into an office. He pays for it with a three-year finance deal. The interest payable on the borrowing from start to finish is £1,800. Because he uses the office 75% of the time for his job, he claims £1,350 from his company. Ajay reduces his salary from £40,000 a year to £38,650, i.e. a reduction of £1,350. This reduces his NI liability by 8% and his company’s NI by 15%. That’s a total NI saving of £310.
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.