Can I use company money to pay my personal mortgage?

Can I use company money to pay my personal mortgage?

Contractors who set up as a Limited Company may find that they have surplus cash in their account, which earns very little interest in the company bank account. A question that many Contractors have is if this money can be used to offset a personal mortgage.

What many Contractors forget is that the money in a company account belongs to the business and that until the funds are moved into the personal account it does not belong to you personally.

In addition, banks will not allow you to use money from your account if you are looking to offset it against a personal mortgage. You can however take money from your account in the form of dividends, a director’s loan or salary, although there are issues to be aware of.

If you are working outside of IR35 there are two possibilities of drawing money from your Limited Company account to transfer to you personally, these are:

  • Directors Loan
  • Early Dividends

Whilst the above options do exists there are complications that you should be aware of for each that we will now discuss.

Directors Loan

Up to £10,000 tax free can be taken from your Limited Company account in the form of a Directors Loan without it being classed as a benefit in kind. However, if your loan is more than this amount you will be required to pay interest to your account at rates assigned by HMRC.

Another point to be aware of is that if you do not repay your loan within nine months of the company’s year end, you will be subject to pay tax at 25% of the value of the outstanding loan to HMRC.  However, when the loan is paid back you will be able to reclaim this tax.

It is important to document all loans taken from your Limited Company so that you can provide a complete record to HMRC if required.

Early Dividends

Dividends can only be paid from the profit your business earns, so whilst using money set aside for tax, with the intention of earning the tax amount later from future expected income seems like a good idea, it is not recommended. Any money taken before profit is available is considered a loan.

As taking early dividends opens up a number of issues, it is not recommended as an option for offsetting a personal mortgage.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

Can Limited Company money be used to offset a personal mortgage?

Can Limited Company money be used to offset a personal mortgage?

Contractors who set up as Limited Companies can end up with large sums of cash in their company bank accounts sitting there in readiness to pay tax liabilities. These deposits don’t earn much interest, so contractors often look at ways to get this money working for them. One option often asked about is whether their company funds can be used to offset their personal mortgages.

 

Banking practice

Banks don’t allow the use of money coming directly from a Limited Company account to offset a personal mortgage. You can only do this by moving funds into your personal account. This is because the money belongs to the company – not you personally – until you take it out of the business as a dividend, loan or salary.

If you are working outside IR35 rules you have two options to transfer funds to you personally:

  • Take a Director’s loan
  • Pay yourself early dividends

 

Director’s loans

Your company can give you a loan of only up to £5,000 tax free and without being deemed a benefit in kind. Loans over £5,000 will be subject to benefit in kind implications, based on the HMRC approved interest rate and this will be calculated when your P11d is prepared. In addition, if you do not repay the loan within 9 months of your company’s year end you will be liable to HMRC for 25% of the total loan amount. The S455 charge will be repaid once the loan has been repaid in full back to the Limited Company. All loans must also be minuted and have full documentation in your company’s records. It’s possible to repay a loan and then take out another a few days later but this is not advisable. This activity will attract HMRC attention and they are likely to argue that this is effectively a continuous loan and apply the tax and interest payments you were looking to avoid.

 

Paying yourself early dividends

This amounts to paying dividends using the money you have set by for tax, with the intention of earning the tax amount later from future expected income. Sounds like a great idea, but dividends can only be paid from available profits.  If the profits are not available and excess dividends have been paid, these will be deemed as a director loan from the business.

The options available raise issues which could incur a nasty sized tax bill or, in some cases, prosecution under the Companies Act 2006. For this reason using company money to offset a personal mortgage is not recommended.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.