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.
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.
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.