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Tax hike on loans to directors and shareholders

In the Budget the chancellor announced that loans to participators will be taxed at an increased rate of 32.5%. Doug Perry of Clayton & Brewill explains.

A participator is typically a shareholder or director of a company with five or fewer owners. Other examples include owner-managed and family-owned businesses.

Loans can be made to provide an individual with funds but they can also arise at the end of the year if a company ends up with an overdrawn director’s loan accounts (ie: when too much was taken out in the form of dividends).

Currently these loans are taxed at 25%. However, from the start of the new tax year on 6 April, the rate of tax will rise to 32.5%, aligning it to the higher rate of dividend tax.

The government has introduced the higher tax rate on loans to target those businesses that seek to reduce their tax bill by remunerating directors via a loan, rather than dividends, as part of a wider scheme of tax anti-avoidance measures.

Business owners need to be ensure that any loans to participators are repaid within nine months of the year end to avoid the higher rate of tax.

Need help with your accounts or tax planning? Talk to the team at Clayton & Brewill in Nottingham – call us on 0115 950 3044 or click here to contact a member of the team.