Tax Free Money

You need to get your hands on some money urgently and your company seems to have plenty, how do you get at this without been charged tax?

You're in a bind and need to get at some cash quickly, you don't have any but your company seems to have enough, yet your accountant advises you not to touch this. Well he would usually be correct as generally the only way to take money out of the company is through a salary or small dividend. However this isn't very tax effective.

Salary

Taking a salary would have an immediate effect. A 40% taxpayer would end up with a tax and NI bill for £8,475 gross when you have only taken £5,000. Not only that the company would also get an NI bill of 12.8% which would be another £1,085. So this solution is obviously not very tax effective.

Dividend

Assuming all the circumstances are correct a Dividend may look very attractive, however there is income tax to think about which isn't deducted at source, by January 2006 you would have to of paid the taxman £1,250 for taking £5,000.

Loan

Luckily there is yet another way that will avoid tax on any amount up to £5,000, legally too! You can take a loan from the company for near any purpose you like, whether it is a new car for a family member or some crisis in your life. However loans over £5,000 are a bad idea and also loans for the following reasons,

To buy your main home.
To buy an interest in the company.
To buy machinery for the company.

For these types of loans you would be taxed personally on the interest saved by not borrowing commercially (currently 5%). There are however ways around this, your accountant should be able to explain those to you. Another benefit is that the company has no obligation to charge you interest and so you don't have to pay it, its much easier if you just keep interest out of it.

Reasoning

At the end of the tax year loans of up to £5,000 don't even need to be recorded upon the P11D (the annual return of expenses and benefits.) You can have the loan for as long as you decide and it doesn't even need to be repaid, and best of all the taxman won't query this. However on the company's annual tax return it will have to disclose any information on loans outstanding for more then nine months after its year-end. The company will then get charged tax at 25% on the balance of the loan; luckily this gets refunded once the loan has been repaid.

Remember

If you don't intend to pay the loan back you shouldn't write it off in the company books as you may then be struck with tax on it all.
If you do intend to repay it then you can always get another one, although you should wait at least 60 days before doing so.
Don't take even a penny more then £5,000 or it will loose its added charm of tax-exemption.
If your spouse is also an employee then you have the opportunity for two separate loans of £5,000.
In the company's full accounts loans to directors (even ones that have been repaid) must be disclosed.