The rate of tax on directors’ loans increased at the start of the current financial year – 6 April 2016 – from 25 per cent to 32.5 per cent of any amount loaned to a shareholder during the previous accounting year which had not been repaid within nine months of the end of that year.

This Budget measure brought tax on directors’ loans in line with Dividend Tax.

When a shareholder is also a director, and the loan interest rate is below three per cent, income tax becomes due on the difference between the interest rate charged and the three per cent rate.

Many shareholders had planned to extract funds from their companies through directors’ loans at a lower rate of tax than the new Dividend Tax rates.

Prior to a change of rules introduced at the start of the 2012/13 tax year, directors and companies had been able to avoid director’s loan tax by ‘bed and breakfasting’ – receiving a directors’ loan and repaying it before the end of the nine month time limit using a new loan from the company.

“Bed and breakfasting” is no longer an option, but there are alternative strategies available to mitigate tax on directors’ loans.

We can help you work out the most tax-efficient way to draw down and access directors’ loans and dividend payments. For more information on our tax services, please contact us.

Link: Gov.uk Directors’ Loans