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Beneficial Loan Interest - to pay or not to pay?

MonsoonMonsoon Font Of All KnowledgeFMAAT, AAT Licensed Accountant Posts: 4,071
A beneficial loan situation occurs when a directors' loan account is in debit by more than £5000. I have been looking at whether it's better to declare this beneficial loan as a BIK, or pay the loan interest.

Example:
Average directors loan balance in year £10,000
Official interest rate 4%.

Beneficial loan interest therefore £400.

If the director does not pay the interest and it's a BIK:

Tax on loan @ 20% £80
Class 1A NI @ 12.8% £51.2

Total to pay £131.2

CT relief on 1A NI £10.75

total cost £120.45
Or more, if a higher rate tax payer (£200.45)


If the director does pay the interest (or it is debited to his DLA)

Loan interest paid £400

CT PAID by company £84 (on income receivable)

Balance to draw as divi £316 (or credited back to DLA)

TOTAL COST £84
If higher rate taxpayer, plus tax on dividend of 25% x £316 = £79, total to pay of £163
Small issue of extra £84 overdrawing on DLA but this will be negligible.


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Based on this, it looks like it's better to just pay the interest, as opposed to declaring a BIK, whether higher rate or basic.

As I've not worked through this before, can anyone add any comments or see if I've missed anything?

Hopefully other MIPs will also find this helpful also.

Comments

  • MonsoonMonsoon Font Of All Knowledge FMAAT, AAT Licensed Accountant Posts: 4,071
    Bump!

    Any opinions?
  • PGMPGM Font Of All Knowledge Registered Posts: 1,954
    Monsoon wrote: »
    Bump!

    Any opinions?

    Your workings and conclusions look sound to me. But then you know more about tax anyway!
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