HMRC has declared that the official rate of interest (ORI) for director’s loans will remain at 2.25% throughout the 2024/25 tax year, despite a notably higher base rate of 5.25%.
This maintains the ORI at the same level for the second consecutive year, a departure from previous norms where it typically mirrored the Bank of England’s (BoE) base rates more closely.
The decision comes as a surprise, especially considering that the interest rate for overdue tax payments has remained at 7.75% since August 2023. This consistent ORI establishes a beneficial tax environment for directors, particularly in the wake of recent reductions to the tax-free dividend threshold, now capped at just £500.
Director’s loans encompass funds borrowed by company directors (or their immediate family) from their own companies, distinct from salaries, dividends, or expense reimbursements. When the interest rate equals or exceeds the ORI, loans under £10,000 incur no additional tax liability.
However, loans not repaid within nine months and one day following the end of the corporation tax period face an additional tax of 33.75% (section 455 tax).
For loans surpassing £10,000, they are categorized as a benefit-in-kind and must be disclosed on self-assessment tax returns, potentially triggering tax liabilities at the ORI.
For further advice and guidance on both personal and company tax, please contact a member of the CB Reid tax team.