The Official Rate of Interest (ORI) for beneficial loan arrangements, like director’s loans, will remain at 2.25% throughout the tax year 2024-25.
This means HMRC has held the ORI for director’s loans for the second year running, despite a base interest rate of 5.25%. This is in contrast to the interest rate on late tax payments, which has been 7.75% since August 2023.
The reasons for freezing director’s loan interest are unclear, as historically HMRC’s official rate of interest has been scalable against Bank of England (BoE) base rates. An example of this was in early 2008 when the BoE base rate was also 5.25%, and yet the ORI for a beneficial loan was 6.25%.
A director’s loan is when you (or other close family members) get money from your company that is not:
- A salary, dividend or expense repayment; or
- Money you have previously paid into or loaned the company.
If the loan is below £10,000 there are no extra tax responsibilities. Loans in excess of £10,000 will incur a benefit in kind on the cash equivalent of the amount of interest that would be payable at the official rate.
You might find that a director’s loan is a tax-effective way of extracting money from your company, specifically in comparison to other methods such as dividends – particularly with the interest rate freeze and the dividend allowance having been reduced again from £1,000 in 2023-24 to £500 in 2024-25.
Depending on the circumstances, taking an interest payment instead of dividends from your company could result in a larger take-home payment.
If a director’s loan account is not repaid within certain time limits, there can be tax implications for both the company and the director. Any additional administrative duties should also be considered when deciding on the most appropriate form of profit extraction for your company, as a director’s loan includes the calculation of average interest and preparing CT61 forms.
How M+A Partners can help
Our experienced Tax team are able to assist with your tax planning requirements – ensuring you make the right choices for you and your company.
For any queries on director’s loan accounts, please get in touch with your usual M+A Partners contact or email enquiries@mapartners.co.uk
