Your company could provide you a cash advance if you need to borrow money to pay for home upgrades as long as you pay interest at the official HMRC rate to avoid receiving a benefit in kind.
You are taxed on a benefit in kind if you are a director and borrow money from your firm at a rate lower than HMRC’s “official rate,” which is currently 2% per year. However, if you pay your company interest at or over the stated rate, this can be avoided. Since April 2021, the rate has not changed; but, if it does, you will need to pay more interest to prevent the triggering of a taxable benefit.
Example. Peter receives a loan from his company, Agency Ltd, in October 2022. The loan has a five-year repayment period and an interest rate of 2% (simple), with neither party having the right to change the terms. In May 2023, Peter pays the interest that has accumulated on the loan for the tax year 2022–2023. There is no benefit in kind because this interest is equal to that which is due at the legal rate. The official rate rise for the 203/24 tax year is set at 4% by HMRC in April 2023. Even though it is less than the interest payable at the official rate, Peter will continue to pay interest at 2% for 2023–2024 and subsequent years.
If your firm were to lend you £40,000 at the official interest rate, you would have to pay a total of £2,027 in interest over the course of five years to avoid being taxed on a benefit in kind. HMRC’s official rate would increase by 2% to 4% if it was raised to keep pace with increases in the Bank of England lending rate (predictions are that further increases are likely). As a result, your interest payments would need to more than quadruple to £4,199 in order to protect you from a taxable benefit and a matching Class 1A NI charge for your firm.
Advice: Any future increases in the official rate won’t influence your tax situation if the payback time and interest rate on loans from your business are fixed. According to the regulation, you can avoid a taxable benefit by continuing to pay interest at the initial rate you specified if the official rate of interest increases in a tax year after the one in which a fixed-term and rate loan is arranged.
Advice: To avoid a taxable benefit, you should consider converting an overdrawn director’s or other loan account with your firm into a fixed-term and rate loan before the start of the 2023–2024 tax year. This means that even if the official interest rate increases, you can continue to pay interest at the current low rate of 2% (simple) without incurring tax on a benefit in kind.
