Loans to Shareholders and Directors
Shareholders and directors commonly draw money from their company without paying PAYE. Their bookkeeper will debit their loan account and these loans typically grow over time to quite significant amounts.
When you owe money to your company, you should be charged interest at least at the official rate (which is 1% above the Repo Rate).
This interest needs only to be a book entry – Debit Loan Account, Credit Interest Received, and the entry should ideally be done monthly. However, to simplify things, the bookkeeper could be instructed to charge interest on the year end balance at the year end official rate. Although this is not accurate, it will probably be sufficient to exceed the correct figure.
The interest received forms part of the company’s taxable income and is not normally a tax deductible expense for the borrower.
Any shortfall between the interest that should have been charged and that which was actually charged is deemed to have been a dividend, and is subject to Dividends Witholding Tax at 20%. Failure to declare the dividend can lead to penalties of 200% plus interest on the deemed dividend plus the penalty.