We get asked lots of questions by our contractors, and this is one that comes up time and time again.
Contractors who work outside of IR35, often ask us this because they may have sums of money held in their business bank account to cover future tax liabilities. While it’s sitting there, it is earning very little interest.
Instead of leaving it in there, they may wish to put it to better use by paying off some of their mortgage.
Every time we get asked, ‘Can I use company to pay my mortgage?’, we explain that, No, you can’t use money held within your limited company to pay your personal mortgage.
Why can’t I use my company money to pay my mortgage?
One of the reasons is that banks won’t allow you to link your business bank account to offset your mortgage.
Contractors sometimes forget that their limited company is a separate entity to them. Therefore, any money that is held within its bank account belongs to the business and not you. This is until you transfer the funds out of the business into your personal bank account.
Once this transfer is completed, the money is yours and you can use it to pay their personal mortgage. But don’t forget that the money transferred from the business bank account to your personal bank account needs to be recorded as salary, dividends or a directors loan and there may be tax implications of this which could far outweigh the benefit obtained by paying off a mortgage.
What are my options?
You can take money out of your limited company’s account in the form of a Directors Loan. HMRC defines a Directors Loan as any money which is taken from the company which isn’t:
- Salary, dividend or expense payment
- Money previously paid into or loaned to the company
You can take a loan of up to £10,000 without it being deemed as a benefit-in-kind. If you take more than this, you’ll have to pay interest to your limited company at rates defined by HMRC. Currently this is 2.5%.
If you fail to repay the entire loan within nine months and one day of your company’s year-end, you will have to pay additional Corporation Tax at 32.5% on the outstanding value.
The good news is though, this additional 32.5% is repayable by HMRC once the loan has been paid off.
You must document all loans taken from your limited company so you can show it to HMRC if you’re asked to.
Most contracting businesses have substantial sums of money sitting in their business’ account which will be used to pay future tax liabilities. The idea is, you would take a dividend using this money and use any future earnings to pay your tax bill. You would have to be very careful using this route as although you may have cash in a business it does not always mean there is sufficient profits to pay a dividend.
If there is not sufficient profit to pay a dividend it is deemed an illegal dividend (or ultra vires) distribution.
If HMRC concludes that you made an illegal dividend distribution HMRC may claim it was in fact salary and you’ll have to pay National Insurance and Income Tax on it.
Before withdrawing any money from your limited company, you should get professional advice from an experienced contractor accountant.
If you’re new to contracting or have been doing it for a while and are interested to find out the most efficient ways to withdraw money from your limited company, speak to one of experienced Directors on 01962 867550. Alternatively, send us a message using our online enquiry form and we’ll be in touch shortly.