October 29th, 2012 / Insight posted in

Interest on firm’s loan

OS writes: I took out a personal loan when I was unable to get a business loan for my limited company, of which I am a director. I loaned the company the money and paid the instalments direct from the company’s account to the lender. This has operated reasonably well, but how do I account for the loan in the company’s accounts?

You need to consider your loan from the bank and the company’s loan from you separately, writes Jon Sutcliffe at Kingston Smith LLP. The company is repaying a loan from you with interest and, in turn, you are repaying the loan from the bank with interest. The company’s accounts will show the loan from you as a creditor on the balance sheet and interest paid to you as an expense in the profit and loss account.

When a UK company is not a bank it must pay interest to individuals after deducting the 20% basic rate of tax. The tax deducted is paid on a quarterly basis using form CT61. You should also declare this interest income on your personal tax return. This does not mean your personal tax bill will go up, though.

Because the interest is incurred on a loan used to finance your company, you can claim the interest paid as qualifying interest on your tax return.