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Author: JP / / Latest News

Better to Pay Interest on your Loan Account than Dividends if your a Higher Rate Taxpayer

Ever since the introduction of the 7.5% increase in the rate of tax on dividends in April 2016, it has been more tax efficient for owner managed business shareholders to pay interest on their loans to the company rather than pay themselves dividends.

The interest would be deductible against the company’s profits saving corporation tax at 19%, whereas dividend payments are not tax deductible. A higher rate taxpayer would end up with more post tax cash, despite the rate being 40% compared to the 32.5% rate on dividends.

Below assumes that the shareholder is a higher rate taxpayer and has already taken a dividend of £5,000 tax free

Dividend Interest
Company £ £
Profit 100 100
Interest (100)
Corp Tax Relief (19)
Dividend Distribution 81
Individual
Gross 81 100
Tax (26) (40)
Net £55 £60

 

The above calculation also assumes that the shareholder has £500 of other interest so that the savings allowance has already been used. Please note also that the company is currently required to deduct 20% tax at source report the interest on form CT61 and pay this tax to HMRC

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