Tax Benefits of Loaning to Loss-Making UK Company

Question

I have a limited company in the UK that is, unfortunately, currently making a loss. The company has been loaned cash (about £2000) by myself but isn't making a profit yet and I have taken no salary from it at all.

Given this situation, I'm undertaking some part-time freelance work on behalf of another company, for which I will generate monthly invoices. My plan was to invoice this other company from myself, thereby acting as a sole trader. Regarding taxation, I would simply include this income as part of my tax return, which I'm obliged to complete anyway as director of a limited company.

Then, a friend of mine told me that I would probably be better off invoicing through my limited company rather than a sole trader because I can pay myself up until the tax threshold and then repay myself back the money I loaned the company, also tax-free. This got me thinking about whether I should basically loan my company more cash in order to further increase my tax free allowance this year.

Then again, aren't there issues with employer's and employee's national insurance if I draw a salary from my company? Does the new auto-enrolment for pensions also take effect if I start to pay myself in this way? If this is indeed the case, then I have to question whether it's worth it at the moment, for the sake of part time work and a couple of grands' worth of tax-free cash.

So, my question basically boils down to this: Is it going to be more profitable to invoice through my limited company for this part time work or will the NI and pensions obligations render it infeasible?

Answer 1

It will depend on how much you expect to earn this way, and whether you expect the company to become profitable soon. Has the company just not made a profit yet, or has it actually made a significant loss that your invoices would just be offsetting?

If you're earning over £10,000 per year then invoicing through the company is preferable. Above that level, you'd be taking money from the company as dividends after paying 20% corporation tax with no other tax to pay on your personal tax return. As a sole trader you'd be paying 20% income tax and 9% NI. (Note however that the company can only pay dividends from profits, which is a problem if there are significant losses to offset.)

Below £10,000, there's little difference. Through the company, you can take a salary of £7956 per year without paying any income tax or NI. With the new £2000 discount on employers' NI you could then take salary up to £10,000 and just pay 12% employee's NI. As a sole trader, you pay 9% Class 4 NI over £7956 and a fixed £143 per year for Class 2 NI. Paying 9% rather than 12% saves you £60, but then you add the £143. In practice the company would work out more expensive at this level because you'll probably want to pay an accountant to deal with the payroll for you.

Having the company repay your £2000 from the invoices doesn't really save any tax if the company will become profitable in the future. You don't pay any tax now since the money you receive isn't income, and the company doesn't pay any tax if the extra £2000 of revenue doesn't put it back in profit. However, if the company is profitable next year then it will have an extra £2000 of profit that would otherwise have been offset against this year's loss, and you do end up paying 20% corporation tax on the £2000. You could still have the company repay the loan in order to delay the tax liability, but it's not really tax free money.

Loaning additional money to the company has no tax benefit, you just give the company £1000 and get your original £1000 back later. You pay no tax and neither does the company, but it was your money in the first place.