How to leverage rising interest rates
Interest rates have been steadily rising over the last 18 months and they're not likely to be going down any time soon. It's easy to complain about the consequently rising costs of doing business, but there are some advantages that may help you to keep some of your hard earned money in your business.
Don't pay your tax early!
If you're well-organised and get your year-end accounts done well ahead of time, it's tempting to just pay the tax bill, then it's done and dusted.
HMRC does offer a repayment rate of interest as of 22nd August it's 4.25%.
Why wouldn't you take advantage of this? For two reasons:
- A decent deposit account could give you 6-7%.
- HMRC are not known for remembering to add the interest due to your tax account.
It may be best to hold onto the cash and pay the tax on the deadline rather than early.
If you're considering making investments, or additional pension payments, get some good advice before you make that decision. It can be much better to keep cash around in a good deposit account. Cash savings are worth more than they used to be.
Pay yourself interest
If you have a director's loan in the business or you can manipulate a director's loan, by putting your own money into the company to fund equipment or premises purchases, you could take advantage of paying less tax when you draw interest.
Any money you lend to the business means you can charge the business a market interest rate. What is a market rate? We tend to use the current rates for unsecured loans e.g. credit cards as a rule of thumb, which are usually in the ballpark of 15-20%. As interest rates go up you can take higher interest rates, maybe as much as 25%.
If, for instance, you have loaned the business money to invest in a property that the company now owns, the interest rates are more likely to be on a par with mortgage rate; around 7-8%.
The downside is you have to fill in a CT61 when you pay yourself interest and deduct 20% which is withheld and paid upfront to HMRC, but it's cheaper than drawing dividends tax-wise it is the most effective way of extracting funds from a Limited company, so the more you can extract in this way the better, despite the admin burden.
The company gets corporation tax relief on the interest and there is no NI payable by the director, you just pay at your current tax rate – 20%, 40% or 45%.
Think before you purchase assets
When it comes to making large purchases, whether that's production equipment or a new electric car, there is the issue of whether to pay outright or pay in instalments through a finance arrangement.
Finance is now much more expensive. When you consider that car finance has risen from 8-9% to around 15%. The same applies to mortgages, so before you consider making substantial purchases for your business, get some sound advice on the cost of borrowing.