Let’s say you owe £5,000 on your credit card, and the interest rate on the loan is 15% APR, which is not untypical.
You want to repay the debt as soon as possible. You could just take an extra dividend of £5,000 and use this to repay the loan but if you are a 40% taxpayer this would give you an extra tax bill of £1,250. This increases to £1,805 if you pay tax at 50%. So this is not the answer.
If you repay the debt over the next nine months you will pay interest to the credit card company of about £230.
A solution is to borrow £5,000 from your own company. Provided you do not borrow more than £5,000, there is no income tax to pay on this loan.
Timing is important because if you get this wrong your company could end up with an additional Corporation Tax bill.
The rule is that if you borrow money from your company you must repay it within nine months from the end of your accounting period. If you do not, then your company will have an extra Corporation Tax bill to pay of 25% of the outstanding loan.
So, for example, if you prepare your accounts up to 31 December 2010 and you borrowed £5,000, you would have until 30 September 2011 to pay the money back without the company having any tax to pay. This is an 11-month interest-free loan.
You can use the company money to clear your credit card and then repay the loan to the company over the next 11 months.
Using the same example of a 31 December 2010 year end, you could borrow £5,000 on 1 January 2011 and, provided the loan was repaid to your company in full by 30 September 2012, there is still no tax to pay. This is a 21-month interest-free period.
Of course, you do need the funds in your company in the first place and if the company has money in an interest-bearing account it will lose the benefit of this income. Please remember you do have personal income tax to pay if you borrow more than £5,000.
See my other thoughts on how to use spare money in the company account here.