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On BiK charges

[Further Information]

To HMRC's official rates

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On paying dividends

[Further Information]

Avoid tax traps when personally using company cash

Owing your company

When you use your company’s money for personal expenses there are no tax issues to worry about unless, taking into account any amounts it owes you, e.g. outstanding expenses claims, undrawn dividends or salary, you’re in debt to it. Even then tax charges only apply if HMRC’s conditions aren’t met.

Two tax charges

As a director shareholder of your company two tax charges can arise where you owe it money:

• if you owe your company money at the end of its financial year and haven’t repaid it within the next nine months, it must pay tax equal to 32.5% of the amount still owing
• if at any point in the tax year you owe your company more than £10,000, you’ll be taxed on a benefit in kind (BiK) (see The next step ).

Avoiding the tax charges

The first of these tax bills can be avoided if your company awards you a dividend or bonus within nine months following the end of your company’s financial year, which you leave undrawn to cover the amount you owe. The trouble is that if the debt has exceeded the £10,000 limit this won’t prevent you being taxed on the BiK.

Tip 1. One way to avoid the BiK tax is to pay your company interest, at HMRC’s modest official rate (2.5% per annum) on the money you owe it over the course of the tax year (see The next step ).

Tip 2. Despite sweeping changes to the rules on 6 April 2017 regarding the timing of payments by employees to employers for the purpose of negating a tax bill on BiKs, payments of interest weren’t affected. They can still be made up to 22 months after the end of the tax year.

Example. Harry owed his company £20,000 for the whole of 2016/17. HMRC’s official rate of interest for that year is 3% (it’s 2.5% from 6 April 2017). As long as Harry pays Acom interest of £600 by 31 January 2019 he will avoid tax on a BiK.

Tip 3. It would be better for Harry to pay the interest by 6 July 2017. That way the company will not have to pay Class 1A NI on the BiK.

Act early to avoid tax issues

By monitoring the balance of debt to your company and ensuring that it doesn’t exceed £10,000, you can avoid having to pay interest to prevent the tax charge. But if you’re running close to the limit it would be easy to tip over it. When that happens the BiK applies to the debt for the whole tax year even for periods when your borrowing was below £10,000.

Tip. To help avoid slipping over the £10,000 mark, give yourself a head start by putting yourself in credit at the start of each tax year. Do this by voting yourself a dividend that you don’t draw. You’ll need to follow some simple rules to make sure, but our brief guide on paying dividends will help (see The next step ).

For more information about the BiK charge, HMRC’s official rate and on paying dividends, visit http://tipsandadvice-business.co.uk/download (CD 18.15.03).