There are many rules, regulations, and personal considerations about putting personal money into a limited company. These rules are in place to protect you, the limited company, and its creditors.
Putting personal money into the business account of a limited company, and then how it can be used and repaid will be decided by the purpose of putting it in, and the documentation created. It’s important to remember that a limited company is a legal entity in its own right.
If you run a limited company, you know how tough it can be. There will be occasions where cash flow, or a potential investment opportunity arises leaving you to ask whether you should put your own business into a limited company.
Can I put personal money into my limited company? Yes, you can put your own money into a business and limited company. It can be done as an investment through share capital, a loan to fund business activities, interest on a loan from the company or a gift.
Each scenario where you put personal money into a limited company will come with its own considerations, rules, regulations, and tax consequences.
In this helpful guide we will explain each scenario where you can put money into a limited company and the consequences of each.
Putting personal money into a limited company is a big commitment and like any big commitment, you need to understand the pros and cons before making it.
How to put money into a limited company in the UK
It’s very simple and easy to put money into a limited company. All you need to do is to transfer it into the limited company’s bank account… but that is where the simplicity stops.
Once your personal money is in the business bank account you will need to know what the other side of that transaction is, where should it be posted in your accounting records. This will decide the treatment of it in the financial accounts and potentially any tax consequences.
You need to ensure that your decision-making process is documented to avoid confusion and doubt. We have provided a list below of the possible reasons to put money into a limited company:
Reasons for putting your personal money into a limited company
- Share capital.
- Loan to company.
- Repayment of loan from company.
- Interest payment on loan from company.
- Gift.
What to do when putting personal money into business account
Follow these steps each time you are putting money into business accounts.
- Discuss it with your professional advisor such as an accountant.
- Put the agreement in writing and deal with subsequent paperwork.
- Keep good records of the transaction and make it clear to your bookkeeper or accountant what the money is for and how it should be accounted.
Using personal funds to start a business
But what about when you want to use personal funds to start a business that doesn’t yet exist? Well firstly, good luck! You may just need it. According to the Office for National Statistics, only 40% of small businesses will survive 5 years.
Using personal funds to start a business can be a cheaper way for the fledgling company to borrow money. Actually, it might be the only avenue available.
Directors’ loans are the safest way to make use of personal money in a business. However, you must also consider this a gamble. If you have found funding your business difficult this might be a sign that you need to do more research around your idea.
If you can fund starting a business from other sources other than your own personal money such as grants, loans or other investors then we urge you to consider exploring those avenues first.
There is no guarantee that you will see a return on the investment or the investment again.
Can you afford to take that risk?
Review your personal circumstances before making such a big commitment. A lot of investors will never invest all their personal money into one business. They have money to invest for a reason.
How to properly record personal money you have put into a business
How you record personal money put into your business will be decided by the nature of why it was paid into the business and the associated paperwork.
There may be filing deadlines attached with the transaction, so it is important that you instruct solicitors and accountants as soon as you make the payment if applicable.
You need to make your advisors aware of the nature of the transaction so they can account for it correctly and send relevant paperwork.
Share Capital
You must tell Companies House about any changes to your company’s share structure that you make.
You may need a special resolution to change your company’s share structure. This includes if you:
- Change the number of shares the company has and their total value – this is your ‘share capital’ (the part of your company’s money that comes from shares).
- Change how your shares are distributed.
- Cancel any of your shares.
- Change (‘denominate’) your shares into other currencies.
You must tell Companies House within a month if you issue more shares in your company.
You must report all other changes to your share structure within 21 days.
Pre-emption rights of existing shareholders
When issuing share capital check the Articles of Association and any shareholders’ agreement to decide whether the existing shareholders have pre-emptive rights to buy any new shares issued.
If there are any such rights, these may need to be amended via a special resolution.
If these rights exist and are not waived, then the existing shareholders will be able to buy any new shares in the same proportion as their existing shareholding.
Allotment of Shares
The directors should resolve to allot more shares – the minutes from this meeting should say the number and class of shares to be issued, who the shares are allotted to, and the price paid (together with this is cash or other assets).
Paperwork
Once the directors have resolved to issue more shares the company should do the following:
- Submit form SH01 to Companies House within one month of the share issue (this can be done online)
- Prepare a share certificate for each new shareholding
- Send a letter to each of the shareholders letting them know about their new shareholdings and let them have a copy of their share certificate
Repaying a Directors Loan Account
You may put money into a business to reduce the balance on a Director’s Loan Account. Make sure whoever is processing the transaction in your accounting records posts it as loan repayment. This will help reduce the amount of interest you might be paying the business.
It will also have an impact on any Corporation Tax charge that has been levied on your Directors’ Loan Account.
You or your company may have to pay tax if you take a director’s loan.
Your personal and company tax responsibilities depend on how the loan is settled.
The timing of reducing your Directors’ Loan Account could affect how much tax you and the business might pay. The timing can also have an impact on when the Corporation Tax charge can be refunded, affecting the cash flow of the business.
Knowing when your financial year-end is important in this respect.
Making a loan to the company
Making a loan to the company may be a preferable option compared to applying for a commercial loan from your bank – it’s a cheaper way of putting personal money into a limited company due to no interest being applied.
It is also often a lot quicker to loan personal money to your company than dealing with a high street lender. We know it can be uncomfortable and time-consuming discussing financial matters especially if you have funds available yourself.
Any loans are recorded in the company directors’ loan accounts. In all cases, we recommend you create a loan agreement between the director(s) and the limited company – which are distinct legal entities.
The agreement should detail the loan size, interest rate, term, and any other conditions.
There is no obligation to do this, but it creates a paper trail which may prove useful in the future and provide the finance team with details on how to process transactions in the accounting records to match.
Although it is unlikely if you have used model formation documents, make sure that your Articles of Association don’t prevent loans being made from the company’s directors.
Do I have to charge interest on a loan to my company?
No. You do not need to charge interest on a loan you make to your own company. This can make it attractive as a possibility of getting money into your business. Charging little or no interest will improve your cash flow and profitability as you are not charging interest to the profit and loss account.
However, you do need to consider how else that money may be used. For example, if the money is sitting in an ISA (Individual Savings Account) or high-interest savings account could it be working harder for you than lending the money to the company.
What risks are attached to earning interest on your money from other sources? If you could earn more money at a lower risk elsewhere you need to think about why you would put it into your company.
Interest income is taxable personally and deductible for the business.
Your company does not pay Corporation Tax on money you lend it.
The interest you charge a limited company on a loan count as:
- A business expense for your company
- … and personal income for you.
You must report the income on a personal Self-Assessment tax return.
Your company must:
- Pay you the interest less Income Tax at the basic rate of 20%.
- Report and pay the Income Tax every quarter using form CT61.
Can a limited company lend money to an individual?
Yes, a limited company can lend money to an individual, but it might get messy and expensive.
A director’s loan is when you (or other close family members) get money from your company that is not:
- A salary, dividend, or expense repayment.
- Money you have previously paid into or loaned the company.
You must keep a record of any money you borrow from or pay into the company – this record is usually known as a ‘director’s loan account’.
Tax on loans
You may have to pay tax on director’s loans. Your company may also have to pay tax if you are a shareholder (sometimes called a ‘participator’) as well as a director.
If you owe your company money
You or your company may have to pay tax if you take a director’s loan.
Your personal and company tax responsibilities depend on how the loan is settled. You also need to check if you have extra tax responsibilities if:
- The loan was more than £10,000 (£5,000 in 2013-14).
- You paid your company interest on the loan below the official rate.
| Your company’s responsibilities if you’re a shareholder and director | Your personal responsibilities when you get a director’s loan | |
| You repay the loan within 9 months of the end of your Corporation Tax accounting period. | Use form CT600A when you prepare your Company Tax Return to show the amount owed at the end of the accounting period. If the loan was more than £5,000 (and you took another loan of £5,000 or more up to 30 days before or after you repaid it) pay Corporation Tax at 32.5% of the original loan, or 25% if the loan was made before 6 April 2016. After you permanently repay the original loan, you can reclaim the Corporation Tax – but not interest. If the loan was more than £15,000 (and you arranged another loan when you repaid it) pay Corporation Tax at 32.5% of the original loan, or 25% if the loan was made before 6 April 2016. After you permanently repay the original loan, you can reclaim the Corporation Tax – but not interest. | No responsibilities. |
| You do not repay the loan within 9 months of the end of your Corporation Tax accounting period. | Use form CT600A when you prepare your Company Tax Return to show the amount owed at the end of the accounting period. Pay Corporation Tax at 32.5% of the outstanding amount, or 25% if the loan was made before 6 April 2016. Interest on this Corporation Tax will be added until the Corporation Tax is paid, or the loan is repaid. You can reclaim the Corporation Tax – but not interest. | No responsibilities. |
| The loan is ‘written off’ or ‘released’ (not repaid) | Deduct Class 1 National Insurance through the company’s payroll. | Pay Income Tax on the loan through a Self-Assessment tax return. |
If the loan was above £10,000
If you’re a shareholder and director and you owe your company more than £10,000 (£5,000 in 2013 to 2014) at any time in the year, your company must:
- Treat the loan as a ‘benefit in kind’.
- Deduct Class 1 National Insurance.
You must report the loan on a personal Self-Assessment tax return. You may have to pay tax on the loan at the official rate of interest.
If you paid interest below the official rate
If you’re a shareholder and director, your company must:
- Record interest you pay below the official rate as company income.
- Treat the discounted interest as a ‘benefit in kind’.
You must report the interest on a personal Self-Assessment tax return. You may have to pay tax on the difference between the official rate and the rate you paid.
Reclaim corporation tax
Your company can reclaim the Corporation Tax it pays on a director’s loan that’s been repaid, written off or released. You cannot reclaim any interest paid on the Corporation Tax.
Claim after the relief is due – this is 9 months and 1 day after the end of the Corporation Tax accounting period when the loan was repaid, written off or released. You will not be repaid before this.
You must claim within 4 years (or 6 years if the loan was repaid on or before 31 March 2010).
If you’re reclaiming within 2 years of the end of the accounting period when the loan was taken out, use form CT600A to claim when you prepare a Company Tax Return for that accounting period or amend it online.
Loans between companies with same Director
Yes, provided the company making the loan has sufficient funds to cover any liabilities arising during the period the money is outstanding.
Whilst the process of getting a loan is faster thanks to fresh players, such as Funding Circle, coming to the market it can still be a lengthy process and there is no guarantee you would secure a loan so lending money between companies might be a sensible alternative.
Consider having a loan agreement drawn up just as you would expect in an arm’s length transaction with the bank. Set out the rules of loan, repayment schedule and any interest calculated.
The loan is not treated as a business expense so will not reduce your Corporation Tax liability. If interest is charged between the companies, then it will need to be treated as taxable income in the recipient business and can be offset against taxable profits in the paying company. Make sure the interest being charged is not excessive. If it is considered excessive by HMRC it can be classed as a distribution.
Details of the loan must be shown by a note in the statutory accounts as a ‘Related Party Transaction’.
Loans between companies with the same Director can be a terrific way to avoid double taxation which would apply if you personally drew the money out of one company, giving rise to a personal tax charge and then put it into the other.
The loan must be lawful from a company law perspective. The directors have several statutory duties, including the duty to act within the company’s constitution, to exercise their powers for a proper purpose, and to promote the success of the company.
This means the company’s Articles of Association must allow the loan and that the lending company must have sufficient reserves.
Gifting money to a limited company
When a company has been trading, a gift would normally be treated as taxable income. If that money is spent on tax-deductible expenditure that will gain tax deductions, so the overall tax position is neutral.
You may consider supplying a loan or new share capital as neither is taxable. Both come with their own rules and regulations. Be sure to read the sections above where we cover Directors Loans and Share Capital in more detail.
If the limited company is wound up the gift is non-repayable.
Taxinsider supplies a great reminder about not forgetting the IHT (inheritance tax) implications of gifting money to a limited company.
“A transfer of value (e.g., a lifetime gift) from an individual to a company is an immediately chargeable transfer for IHT purposes, subject to any available exemptions and/or reliefs (by contrast, a gift to another individual is a potentially exempt transfer (PET), which becomes exempt from IHT if the donor survives at least seven years).”
A chargeable lifetime transfer to the company in excess of the individual’s available nil rate band (£325,000 for 2018/19) is liable to IHT at 20%, and further IHT may become due if the donor dies within seven years.
The IHT charge (if any) is based on the reduction in value of the individual’s estate as a result of making the gift. In an owner-managed or family company where the individual making a gift to the company is a shareholder, this reduction may be offset to the extent of any increase in the value of the individual’s company’s shares resulting from the gifted asset.
Frequently asked questions about putting personal money into a limited company
Can I put personal money in my limited company?
Yes. You can choose to put your personal money into your limited company. There are several items to consider when doing so.
Where should it be posted in your accounting records? This will decide the treatment of it in the financial accounts and potentially any tax consequences.
Make sure that your decision-making process is documented to avoid confusion and doubt. We have provided a list below of the possible reasons to put money into a limited company:
- Share capital.
- Loan to company.
- Repayment of loan from company.
- Interest payment on loan from company.
- Gift.
Each of these options will have different rules and regulations. You may wish to seek professional advice to fully understand what the reporting requirements and tax implications are for each choice.
What is it called when you put money into your own business?
That depends on why you have put money into your business and what documentation has been produced to provide evidence.
For example, if you expect that money to be returned then it would be a loan to the business. Are there board minutes, is there a loan agreement etc
If the cash has been invested in the business, then it is likely to be called Share Capital and you will have bought shares in the business. These come in all sorts of denominations with various rights attached. It is important to know what you are buying before investing in shares.
If you are putting money into your business with no strings attached and no possibility of it being returned this would be considered a gift.
If you are putting money into your business to satisfy a loan you took from the business then this would be called a Directors Loan Repayment.
Can you lend money to your own company?
Yes, you can lend money to your own company in the form of a loan. This can be a cost-effective way of funding your business if you do not charge the business interest or charge it a lower rate than may be achieved through a lender.
If you do lend money to your own company and charge it interest, the interest you personally receive will be treated as taxable income.
Interest income is taxable personally and deductible for the business.
Your company does not pay Corporation Tax on the money you lend it.
The interest you charge a limited company on a loan count as both:
- A business expense for your company.
- Personal income for you.
You must report the income on a personal Self-Assessment tax return.
Your company must:
- Pay you the interest less Income Tax at the basic rate of 20%.
- Report and pay the Income Tax every quarter using form CT61.
Conclusion
The decision to put personal money into a limited company is complicated. Feel free to send a bank transfer and forget about it but you reap what you soe.
You need to consider why you are putting personal money into a limited company, what purpose will it serve, what are you getting in return, and what happens if the business cannot pay it back to mention just a few items.
Once you have made the decision, it needs to be documented so all parties are clear on what the exchange is, and what the future looks like.
Remember a limited company is a separate legal entity so putting personal money into a limited company and taking it out again may have repercussions that you need to factor in when taking this action.
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Jon has been in business since 1999, and in that time worked with more than 300 small business clients. As well as being an accountant, he is also an early adopter of tech, and has helped small businesses to leverage the power of their computer systems by creating software to automate and simplify accounting tasks.
