If you’re a contractor and you’ve accumulated an impressive amount of savings in your limited company account, could you put that money to use to pay off your mortgage or at least offset part of it?
It’s a recurring question we get from our contracting clients so we thought it was the right time to write a new article about it.
Here’s the thought process
There are a good number of offset mortgages available now for contractors (limited company directors too).
An offset mortgage monthly repayment is worked out by how much is left on the mortgage minus any amount of money you have saved up in a linked bank account.
So, let’s say your mortgage was £200,000 but you had £60,000 in your linked savings account. At a 1.89% mortgage rate, your monthly payment would reduce by £94.50 to £742.53 by putting £60,000 into savings. That’s equivalent to an annual mortgage repayment saving of £1,134.
What if that £60,000 was a loan from your company and not salary? Instead of sitting there in your business account earning next to no interest, you could get that money working for you and save yourself £1,134 instead.
It’s a clever idea and it sounds like it could work.
Here’s why HMRC will strongly disagree
First of all, all loans over £10,000 from a company to a director or an employee are considered as taxable benefits in kind. You’ll have to declare this on your P11d and it’s almost certain that a £60,000 loan will attract HMRC’s attention, moving you up the queue for future investigation.
If you don’t pay the loan off within 9 months of your accounting year end, your company will have to pay 32.5% of the loan amount to HMRC as a special corporation tax payment (S455). You can claim it back but you will be waiting a long time to receive it.
If you pay the loan off and then take it out again a few days later, HMRC may argue that the second loan is really part of the first loan and look to charge the company S455 tax anyway.
You may also be breaking company law. If you normally carry a balance of £70,000 in your business account and take out £60,000 over a long period of time, you are not acting in the interests of the company. This is unlikely to come and bite you unless the company goes into liquidation and you could well be prosecuted under Companies Act for the behaviour.
What if the £60,000 was a dividend and not a loan?
That’s another option and certainly more viable than the loan approach.
The dividend approach brings its own dangers though. Dividends can only be declared on profits retained by the company – that is, the money you’ve made so far and not taken out in dividends or paid/be due to pay in tax.
If you gifted yourself a £60,000 dividend but there was not £60,000 worth of profit left in the business, the dividend would be unlawful if not redeclared as a director’s loan. And if it is redeclared as a director’s loan, you start to become in danger of falling into the traps mentioned above about the company lending you money to pay into your offset mortgage account.
Nice idea, but don’t do it.
There are far too many risks involved in using company money in this way, whether as a loan or a dividend. Smart Team’s advice is “don’t do it”. If you want to talk about how to make your company money stretch further and discover ways of taking money out in much safer ways, please call us on 01202 577500 or email us at [email protected].