Interest rate for director’s loans frozen at 2.25%

For the 2024/25 tax year, HMRC has announced that the official rate of interest (ORI) for director's loans will remain at 2.25%, despite the base interest rate being considerably higher at 5.25%.

The ORI has been set at this level for the second consecutive year, contrary to past practices where it typically aligned more closely with the Bank of England's (BoE) base rates.

Due to the fact that the interest rate for late tax payments has been set at 7.75% since August 2023, this move is particularly surprising. As a result of recent cuts to the tax-free dividend threshold, the steady ORI provides a favourable tax scenario for directors.

In contrast to salaries, dividends, and expense repayments, directors' loans are borrowed from their own companies. If the interest rate matches or exceeds the ORI, there is no additional tax liability.

Those who fail to repay their loans within nine months and one day after the corporation tax period ends face an additional tax of 33.75% (section 455 tax).

The ORI may impose tax on loans exceeding £10,000, which are considered benefits-in-kind.

For more info go here: https://www.gov.uk/government/publications/rates-and-allowances-beneficial-loan-arrangements-hmrc-official-rates