Charging your limited company rent or interest: contractor overview

A tax rate on your contractor limited company profits of up to 26.5% sounds swingeing but it may mean that certain tax planning possibilities that wouldn’t be worthwhile in 2022-23 may be worthwhile in 2023-24, specifically related to charging your company rent and interest, writes chartered accountant Graham Jenner of contractor accountancy firm Jenner & Co.

Tax planning aspects that may be worthwhile in tax year 2023/24

1. Charging rent to the company for use of home as office
2. Charging interest on money loaned to the company

While both of the above have been possible in the past, they may not have been worthwhile to droves of one-person companies due to the relatively low corporation tax rate of 19%.  That rate will still apply for companies with profits of under £50,000 but it is worth giving the above two charging ideas a fresh look if your corporation tax rate will be increasing, which for many contractor companies it will be from April 6th 2023.

Can you charge your limited company rent?

Many director/shareholders claim a small amount from the company, to cover the incremental costs of operating the business from home. 

HMRC offers a ‘flat rate’ of £4 a week which does not require any receipts, and is not taxable on the director. For HMRC guidance on this flat rate see EIM01476.

Although simple to claim, at only £208 a year, this has a negligible effect on the overall tax position.

A more substantial tax benefit might be achieved by charging the company rent for the use of part of the home. 

This only applies in certain circumstances and takes a bit of effort. Four fundamental tasks to do are as follows:

1. Determine a ‘market rent’ for the part of the house you are going to charge rent for. You could do this by researching the cost of serviced offices in the local area. 
2. Draw up a formal rental agreement. Be aware that to avoid possible capital gains tax implications when you come to sell your house, it is best if the company does not have sole use of that space, and this should be written into the rental agreement. Technically, the amount of the rent should reflect the fact that the company does not have exclusive use, but a small discount against market rates for exclusive use serviced offices would suffice.
3. Approve the rental agreement at a board meeting and prepare and sign minutes of the meeting.
4. Sign the rental agreement as individual(s) and on behalf of the company. If the property is in joint names, then the rental agreement should reflect that.

What is the tax saving achieved of charging your limited company rent?

If we assume that a tax-efficient salary is being taken, and that the amount of rent that could be charged would otherwise be used to pay a dividend, then the tax savings are as follows:

1. Company’s profits would be below £50,000 -- £50 per £1,000 of rent p/a
2. Company’s profits would be above £50,000 -- £120 per £1,000 of rent p/a.

N.B. Where the rent takes the profits below £50,000, the saving would be £120 per £1,000 until the profits are below £50,000, at which point the saving reduces to £50 per £1,000 of rent.

The above (i and ii) assumes the director/shareholder is a basic rate taxpayer in respect of the rent or the dividend. For a higher rate taxpayer, the saving is similar where the profit is below £50,000. Above £50,000 profit, the saving for a higher rate taxpayer is only £105 per £1,000 of rent.

Please note, I have intentionally not included anything that could be deducted from the rent for the incremental costs as these would be fairly negligible -- at around the £4 p/w accepted by HMRC.

As can hopefully be seen, the question of whether charging the company is worth the aggravation depends on the level of rent that can be justified.

What about charging interest on money loaned to the company?

If you have loaned money to the company, either by way of an injection of funds or, perhaps, by leaving dividends or salary due to you, undrawn, you could charge the company interest.

This can be charged at commercial rates that you’d get for a similar unsecured loan, perhaps 8% to 10%.  The interest will be a cost to the company and so will reduce the corporation tax charge.

The company will need to deduct and pay over to HMRC, 20% tax on the interest. If the director is a basic rate taxpayer, there is no further tax payable. For each £1,000 of interest charged the figures are the same as for rent, i.e. £50 p/a if the company has profits under £50,000 and £120 if over (£105 for higher rate taxpayer).

As an example, a loan of £100,000 at 10% would result in a net saving of £1,050 p/a for a higher rate taxpayer and assuming the company’s profits are greater than £50,000.

Paperwork requirements

But contractors, there is some paperwork to do:

1. Determine an appropriate rate of interest.
2. Draw up a formal loan agreement.
3. Approve the loan agreement at a board meeting and prepare and sign minutes of the meeting.
4. Sign the loan agreement personally and on behalf of the company.
5. Complete form CT61, and pay over the 20% tax deducted, for each return period in which there is a payment of interest. If interest is paid monthly, this will result in 4 or 5 returns being needed. Top tip: Pay interest only once a year to reduce the administration!
6. Declare the interest received on your Self-Assessment Tax Return.

Bottom line...

The above may seem quite marginal, at least where small amounts of rent or interest can be justified. However, they all add up especially with your corporation tax bill potentially increasing, so they are worth considering, even if you then dismiss them as ‘not worth the effort.’ Get advice from an accountant, so that you don’t end up paying tax unnecessarily.