The start of the 2016/17 tax year saw the introduction of the Personal Savings Allowance (PSA); from 6 April 2016 basic rate taxpayers can receive £1,000 interest income free of tax. Interest from ISAs does not count towards the PSA because it’s already tax free.
Higher rate taxpayers have a £500 allowance and those with adjusted net income of over £150,000 will not be entitled to the PSA.
This presents a tax planning opportunity for those who have made a director’s loan to their company and the loan is used for trading purposes. For those directors with loan accounts in credit, it is not unreasonable to charge the company interest, although it is advisable that the interest be calculated at a commercial market rate.
The company must deduct basic rate tax from payments and report the tax deducted on form CT61. Any overpaid tax will be refunded via self-assessment.
It may also be possible for directors to utilise the starting rate for savings, along with the other tax allowances available, and therefore extract up to £22,000 tax free from their companies each year. This should be discussed with a tax advisor before undertaking.
Please contact Green & Co Accountants for more information on 01633 871122.
Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.