People, who’re in the contracting business, often ask us ‘Can I use Company’s money to pay my personal mortgage?’ The answer is no! Read on to find out the reason.
Those contractors who work outside IR35 prefer to keep their money in the company’s bank account to pay future tax bills or keep it in the shareholder fund to cope with any unfavourable situation. While the money doesn’t make a sufficient interest there, therefore, contractors wonder if they can better utilize their company’s money by paying off their personal mortgages.
However, they can’t use the company’s money to pay their private mortgages. Let’s find out the reasons behind it.
Why can’t I use my Company’s Money?
The main hurdle to use your company money is the bank, as it doesn’t allow you to attach your company’s account directly to offset mortgage.
Secondly, you should keep this thing in your mind that, unlike a sole proprietorship, a limited company is a separate entity. Hence, the money that is there in the business bank account is the ownership of the business, not yours. Later, if you transfer it to your personal account, you can use it for your personal expenses.
While transferring, remember to withdraw your money as a dividend, salary or director’s loan. Otherwise, you may have to pay taxes that will surpass the benefit you’re going to get on paying off mortgages.
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Cost-friendly Options to Withdraw Money from the Limited Company:
There are many options available to take out the money from your limited company, but the most cost-friendly options are to get money as salary, dividend or a director’s loan.
Many contracting businesses keep their money in the company’s bank account for future use. You can take a dividend from that money and can use your future earnings to pay tax liabilities. You need to be careful while investing as you may have the money in the business’s bank account, but it doesn’t mean you’d always get a dividend on the profit earned by the company.
If your company has not enough profit to pay you a dividend, it’d be called an illegal dividend. Illegal dividend distribution may be claimed as a salary by HMRC. Consequently, you are liable to pay National Insurance and Income Tax on it.
Want to withdraw money from your limited company, get professional advice from a contractor accountant to avoid extra charges.
The second option to take money out from the company can be a director’s loan.
HMRC defines a director’s loan as the money taken from the company that isn’t dividend, salary or expense payment and that has been paid previously or loaned to the company.
In a director’s loan, you can receive a loan of up to £10,000 that will not be considered a benefit in kind. In case, if you withdraw more than the threshold, you’d be liable to pay 2.5% interest to the limited company.
If you won’t repay the full amount that you borrowed within the time limit of nine months and one day at the end of your company’s accounting year, you’d be liable to pay an extra corporation tax at 32.5% on the outstanding value. Luckily, this additional 32.5% rate is repayable by HMRC after you pay off your loan.
You need to keep track of all the loans you have taken from your limited company to provide evidence to HMRC when asked.
For more details contact the HMRC website.
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Summing up, you can’t directly take the money out from the limited company to pay off your personal mortgages. However, there are some cost-affordable options to withdraw your money. You can take out your money as dividend, director’s loan or salary, whereby you can use it for your personal expenses.
Still confused! Talk to our contractor accountant to solve your issues.
Disclaimer: This blog post provides general information on using your company’s money to offset mortgages.