COVID-19 situation put many of us in a financial difficulty. Government has prepared help for struggling businesses and we can get a Bounce Back Loan (BBLS). This is a loan (still need to be re-paid), but interests are low (2.5%), and it is extremely easy to get. All we have to do is answer few questions and money will go into our business accounts within a few days. You can find details here how to apply: https://www.gov.uk/guidance/apply-for-a-coronavirus-bounce-back-loan
Unfortunately, many people treated this loan as a source of almost free money. Directors are starting to withdraw it from companies accounts and use money to buy houses, cars, boats etc. I will not write here about moral side of this decision much, but I only mention that for financing of this luxury products we all will pay in our taxes.
Did we think about tax consequences?
Let us assume we are a director of a company and we are withdrawing £20k and simply sending the money into personal bank account.
Some of individuals think they can do it with no additional tax to pay if the company will repay the loan. I already has these type of clients and after consultation they want to send money back to company…
Limited company is a separate entity and unfortunately it cannot be done.
We could withdraw it in a form of dividends and tax it as dividend income, so pay tax at rate 7.5% or 32.5%. But to withdraw dividends, company must have profits, and loan is not a profit of a company. If company did not earn enough, we simply cannot take dividends out from the company.
The only option is to treat this withdrawal as a salary income (bonus) and tax it through PAYE. We must pay income tax (20% on first tax band), employee NIC (12%) and maybe employer NIC – another 13% at the top. I think there are cheaper ways to get a loan than this.
Please, before you take BBL contact accountant/tax adviser and get professional advice. It might be costly at the end if you do not. Do not listen to your friends in a pub and their stories what they can get for this loan. Just think before you act.
Any questions? Can I help you? https://mlaccounts.co.uk/medway-contact-us/
Monika Litkiewicz, Chartered Tax Adviser