Can you lend £ to your company and charge it a higher interest rate to generate more income, and would doing so be tax efficient?

Company borrowing - Strict rules dictate when a company is allowed to lend money to a shareholder but there are no equivalent rules relating to directors and shareholders lending to their companies.

Tax deductibility is the key - If you charge your company interest on money you lend, it is taxable income for you. The tax efficiency will depend on the rate of corporation tax (CT) vs. the rate of income tax you’ll pay.

Tax deductible or not? - The CT rules differentiate between trading purposes (e.g. buy equipment) and other reasons. Broadly, the CT rules say that interest incurred “wholly and exclusively” for the purpose of a company’s business is tax deductible, while deductions for other interest are subject to more restrictive rules under the loan relationship regime. If you lent it money when it didn’t have any real need for it, the interest would be a loan relationship deficit. Since April 2017 the rules on loan relationships were relaxed, but they may be reinstated.

Trap. If you charge interest at a rate that is greater than your company would pay if it borrowed money from a bank etc. HMRC can argue that it’s not entitled to tax relief the excessive interest. Therefore, only charge interest at a commercial rate.

Tip. Best if we use the published rate ‘official rate of interest’, then we cannot get into trouble.

Tip. If your spouse or partner pays tax at a lower rate than you, or vice versa, the person who pays the lowest rate of tax should lend the money to your company to increase the tax efficiency.

Sum-Up: You can lend to your company and charge it interest. As long as you don’t overdo the interest rate your company can claim tax relief for this. You’ll be taxed on the interest you receive but, taking account of corporation tax relief your company gets, extracting income from your company this way is more efficient than through dividends.