HMRC has announced that the official rate of interest (ORI) for director's loans will remain at 2.25% for the 2024/25 tax year, despite the base interest rate being considerably higher at 5.25%.
This marks the second consecutive year that the ORI has been set at this level, contrasting past practices where it typically aligned more closely with the Bank of England's (BoE) base rates.
This move is particularly surprising given that the interest rate for late tax payments has been set at 7.75% since August 2023. The steady ORI provides a favourable tax scenario for directors, especially in light of recent cuts to the tax-free dividend threshold, which is now only £500.
Director's loans involve money borrowed by company directors (or their close family members) from their own companies, distinct from salaries, dividends, or expense repayments. For loans under £10,000, no additional tax liability arises if the interest rate matches or exceeds the ORI.
Loans not repaid within nine months and one day after the corporation tax period ends face a 33.75% additional tax (section 455 tax).
For loans exceeding £10,000, they are considered a benefit-in-kind and must be declared on self-assessment tax returns, potentially incurring tax at the ORI.
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