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Can contractors use the money in their limited company to offset their mortgage?

Can-contractors-use-the-money-in-their-limited-company-to-offset-their-mortgageCan contractors use the money in their limited company to offset their mortgage?

Over the last few years many of our contractor and freelancer clients have posed the question above.

Contractors and freelancers often have large sums of money sitting in their bank accounts put aside for taxes. Sometimes these taxes, such as corporation tax are not until 21 months later.

With many offset mortgages offered on the market, contractors feel the money is best used to offset their mortgage saving them money on their payments.

We explore the potential pitfalls for contractors and freelancers of using personal mortgages offset with money from a limited company.

Firstly what are the potential ways I can transfer money from my limited company to offset my personal mortgage? They are:

  • Loans
  • Dividends (taken early)

Loans:

This is the most common method used by contractors is in a form of  a loan, however there are specific points HMRC raises around this:

The tax free loan amount is £5,000.

The loan up to £5,000 will not give rise to a benefit in kind to be reported on your  p11d ( PAYE form), however if you go over £5,000 this will attract interest at HMRC 

 

However, any directors loan over £5,000 unpaid 9 months after the year end will give rise to s455 charge of 25%. Overdrawn directors’ loan accounts can also raise a potential investigation with HMRC.

 

Hence, contractors and freelancers must really consider weather taking a loan over £5,000 is really worth it given the potential penalties and warning signals it can send to HMRC. Although one piece of good news is that the tax free loan amount is rising to £10,000 after April 2014.

 

Dividends:

Taking a dividend is perfectly fine to offset a mortgage payment. It is a rather creative practice of taking an early dividend from a limited company this is illegal.

Why is it illegal? Because this constitutes an illegal dividend distribution, where basically you are taking more money out of the company than it can afford to pay i.e not enough profit.

Although divided vouchers are a legal requirement when declaring dividends, there is no requirement to report them to HMRC or companies house, so some contractors may feel they can get away with this. However, if investigated by HMRC you could be forced pay back the dividend as a salary furthermore incurring tax and NI, not forgetting the penalties and interest!

All in all taking dividends early is not a smart idea!

 What about IR35?

If you are within IR35 then you can only take a salary (within IR35 rules), hence the above does not apply to you.

 Let’s wrap things up…..

You can only take up to £5,000 rising to £10,000 from April 2014 as a loan to offset your personal mortgage. However, you must weigh up the benefit (which is small in most cases) to the potential pitfalls.

For more details please contact your accountant or you can speak to one of our specialist contractor and freelancer accountants on 020 7969 2793.

About Hardeep Mangat

Hardeep is a down to earth accountant, who loves helping contractors, freelancers and small businesses save tax and make more profit. He also has a particular interest in IR35 . Hardeep attended University College London and is a Chartered Certified Accountant, who previously worked for Credit Suisse Investment bank and at a local accountancy practice.

Hardeep on Linkedin and Google+


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