The interest rate set by the Bank of England impacts many other UK rates, including those pertaining to a mortgage, loan, or savings account. Bank Rate is more commonly referred to as Interest Rate or Base Rate, just so you know, and BoE has raised these rates to combat the increasing inflation. According to them, this is their ‘go-to’ tool for bringing inflation down.

Why the BoE has increased the base rate and what they believe it will accomplish

The BoE website states that they already know how people will be facing higher borrowing costs after interest rates are raised – and that some businesses will indefinitely face higher loan rates as well.

BoE even empathized with UK folks that these steps will make things harder for people, with the already high energy and grocery bills especially. However, their website also states that this was a necessary step they took to lower inflation.

How high will interest rates go and how will this impact the cost of living?

The Bank of England has stated that they will increase interest rates more in order to bring inflation down as much as required by the UK government. How high this interest rate or bank rate will go depends on what happens to the UK economy in the coming months, and how the rate of inflation may be affected over the course of the next few years.

As it stands, the UK’s economic future seems uncertain, so BoE has not provided any precise figures in regard to how high the base rate could climb. With that said, they will continue reviewing the state of the economy and then decide whether an increase in base rate is indeed required every 6 weeks or so.

Their next date to review the interest rate will be the 15^th of February, 2023.

Here’s how the increasing base rates might impact the average UK resident:

If you’ve taken a loan or mortgage where you are charged according to a variable interest rate, then you may have to deal with higher repayments. But if you’re on a fixed rate, then there will be no impact on the repayments until the end of your fixed term.

At the same time, it’s worth understanding how different interest rates can impact the way you make the repayments. This mortgage calculator (as provided by the BoE website) is a good way to determine how your monthly payments are going to be affected.

If your savings are in a bank account that pays interest, then you might find higher interest rates on those savings.

Let’s take a more in-depth look into how the above three may be impacted:

Mortgages

According to a survey done by the government-owned English Housing Survey, just below a third of households are currently on a mortgage.

Following a period of really low rates, homeowners are now having to deal with very expensive repayments each month. In fact, BoE has stated that on average, 4m households will be dealing with higher monthly mortgage repayments by next year.

Whenever interest rates increase, around 1.6m people on variable rate and tracker deals tend to see an immediate increase in monthly repayments. The bank rate increase of 3.5% means that folks who are on the usual tracker mortgage will pay around £49 more each month; those on standard variable rate mortgages will pay £31 more.

These increases already come on top of previous interest rate increases – in contrast with pre-December 2021, the average tracker mortgage holder will now be paying approximately £333 more per month, while variable mortgage holders approximately £210 more.

Loans and credit cards

BoE interest rates also impact the amount which is on loans (both bank and car) as well as credit cards.

Even before the latest decision was made, the annual average interest rate in October 2022 was 20.73% (bank overdrafts) and 19.31% (credit cards). It’s possible that lenders may hike prices further in anticipation of higher interest rates next year and beyond.

Savings

Both individual banks and building societies tend to pass on interest rate increases to their respective customers, although the deals currently on offer are much better than anything customers have been getting in recent years.

On the one hand, this means that savers will enjoy a higher return on their money, but on the other, these interest rates will likely not be able to keep pace with the rising prices – due to the current state of the economy, of course.

So, this means that the buying power of cash savings is going to continually fall in real terms.

How will things pan out in the near future?

In a recent assessment, BoE has stated that the current recession will be long although shallow.

Paul Dales, a senior UK economist, believes that the base rate will likely remain above 4% next year before it falls in 2024 – this appears to be accurate as the Bank of England is currently focused on ridding inflation from the UK economy.

However, plenty of other economists have stated that rate cuts might come in the spring of 2023 to avoid the current recession spiraling out of control and turning into a slump.

This sparks interesting questions: are other countries also increasing their interest rates?

The UK is, in fact, affected by prices that have been rising globally – there’s definitely a limit to how effective the bank rate rises in the UK will be. At the same time, it’s interesting to note how other countries are taking a very similar approach – i.e. raising their interest rates.

The US central bank has announced major interest rate rises – taking its key rate to levels that have been unheard of in the past 13-15 years. Other central banks are also driving rates up, because inflation does not selectively attack specific countries – at present, it has caused serious problems in most of the world’s major economies.

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What is Director Loan Account?

Director loan is the amount received by the director which is not received against compensation of services i.e salary income, dividend income, reimbursement of expenses on account of performing any duty or the amount received which is previously paid as a loan to the Company.

Impact on Taxation

At the end of the financial year there would be tax implication on loan which may be either way i.e Loan received from the Company or on Loan paid to the Company

Exemption Limit for Director Loan

Director may need to withdraw cash in case of emergency needs but there is a limit to such withdrawal otherwise they would be treated as benefit in kind and would be subject to taxation, maximum limit for loan is £10,000 (£5000 in 2013-14).

Director Liability in Case of Loan from Company

If the Loan obtained from the Company remain within the exemption limit i.e £10,000 there would be no tax liability on it, only liability is to report as loan in self-assessment return.

Records to Be Maintain

Director must maintain a complete record of the following

Loan obtained from the company
Loan repaid during the financial year
Interest paid during the year to Company on loan
Discounted interest charged by the Company on loan.
Interest Received in case of loan to Company.
Tax deducted by the Company on interest charged. i.e 20% of amount accrued
CT61 form of the quarter reported must be accompanied by supporting documents

Maximum Period of Loan

HMRC has prescribed limit for Corporation tax that will be paid subject to time period of utilization of
cash following example would be helpful in understanding the calculation
The sum of tax paid at 32.5% can be reclaimed, but only after the full loan has been repaid to the company.

Furthermore, it can only be reclaimed 9 months and 1 day after the end of the financial year in which you repaid all the loan to the company. Elsa borrows £10,000 on 11th June 2020 and his company’s financial year-end is 31st September 2020. Elsa will have until 1st July 2021 to repay the loan. If she does not pay by 1st July 2021, the company has to pay 32.5% of £10,000 as a tax which is £3250, however Elsa can claim this tax of £3250 after settlement of complete this may impact a temporary outflow to Elsa. Further if Elsa does not repay loan by July 1st, 2022 interest will be added in corporation tax which cannot be claimed back.

In rare circumstances if director does not pay back loan or it is written of the Company, the loan should be reported in class one insurance and contribution shall be paid through Company Payroll.

Time Period for Reclaim of Corporation Tax

Maximum period for claiming this corporation tax is within 4 years (or 6 years if the loan was repaid on or before 31 March 2010).
If you’re reclaiming 2 years or more after the end of the accounting period when the loan was taken out, fill in form L2P and either include it with your latest Company Tax Return or post it separately.
HMRC will pay the amount while using latest detail of Company tax return or through cheque separately to the Companies registered address.

Loan Paid to the Company

The most commonly observed second scenario would be the loan paid by the director to Company to fulfill the financial obligation or to temporarily bridge the working capital requirement for the Company, director may charge on such loan which will be

• a business expense for your company
• personal income for you

The income must be reported by director in income Self-Assessment Tax Return

Liability of Company in Case of Director’s Loan Liability

Company should deduct tax while making payment on account of interest at the basic rate of 20% and report these payment on quarterly basis on form CT61 which can be downloaded from HMRC websites online or for convenience can be get through call at HM Revenue and customs.

Conclusion

It is advisable that for a director to obtain a loan within the prescribed limit of £10,000 to avoid hefty taxes that may be reclaimed but still result in a financial burden on current cash outflow in financing activity section of financial statement, one must obtained professional advice before obtaining /repaying the loan as scenario may be vary depending on each case that may not be explained in particular.

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“Alphabet shares” is a term used broadly to describe unique classes of shares – for example, ‘A-shares, ‘B’ shares, and so on. These shares have certain rights allocated to them according to the company’s Articles or Terms of Issue. Therefore, alphabet shares are used for unique purposes in different companies. Examples include alphabet shares for family companies, those for new ventures, and those for employees.

When a company pays out a dividend, all the respective shareholders receive payment in accordance with their individual shareholdings. If the company wants to pay one shareholder in preference to another or pay them at a different rate, then they must either have different kinds of shares in place or the underlying shareholdings must be changed – or they must resort to dividend waivers – which we’ll explain in just a moment.

The way alphabet shares work is this:

Since dividends are at times a more tax-efficient way of paying income to shareholders and directors than salaries, most companies want to enjoy the flexibility of paying dividends that are not proportionate to the individual’s shareholdings. And, in such cases, the ‘A’ ordinary shares are held by one individual, all the ‘B’ ordinary ones by another, and so it goes.

A dividend can then be declared on the A ordinary shares at a fixed rate while on the B ordinary shares, there will be a different rate. In order for the company to pay different rates on, for example, the ‘A’ and ‘B’ ordinary shares, it must explicitly have a clause in the Articles which allows the shareholders to vary the dividends between each class or ‘alphabet’ of shares. The concept may be a bit confusing to grasp at first, but it isn’t, once you know how alphabet shares generally work.

What is a Dividend Waiver?

Shareholders in a company have the option to receive income as dividends, which the company must declare after retaining profits. Dividend waivers simply refers to a shareholders ‘waiving off’ their entitlement to receive a share of the profits for the financial year. The waiver itself is a legally binding document prepared by a legal professional.

A common motivation for shareholders to waive off their dividend is when they feel they don’t require the money and that it would be better for the company to retain this as profit. Another reason is concerns around tax inefficiency because there are certain pitfalls associated with dividend waivers – no wonder the HMRC would rather have shareholders exercise their entitlement than waive it.

A dividend may only be waived off by a shareholder and not the company. However, if the company wishes to decide which shareholder should get a dividend, then it will need to come up with different classes of shares and also ensure that each shareholder has access to a unique class of shares (A, B, C, and so on), and never the same; this is where alphabet shares come in.

Dividend Waiver or Alphabet Waivers – Which one should I choose?

We discussed at the start of the article that whenever a company pays out dividends to its shareholders, the payments they receive need to be in proportion to each individual’s shareholdings. However, if they decide to pay different shareholders at different rates, then they’re either needs to be a dividend waiver in place or different types/classes of shares that allow for different rates to be given as dividends to different shareholders.

So, this begs the question: dividend waiver or alphabet shares? Let’s consider the following:

• If a dividend waiver is currently the usual method for allowing surplus profit to be distributed as dividends to shareholders, but at a different rate for each shareholder, then alphabet shares offer a permanent solution.
• A dividend waiver will likely attract attention from HMRC, particularly if the company does not have sufficient distributable reserves to pay shareholders the full dividend without any waiver in place.
• Dividend waivers can be somewhat unreliable because the shareholders must provide their consent every time; however, dividends paid to alphabet shareholders do not require any consent from the other shareholders.
• Alphabet shares offer different voting rights as well as other rights/restrictions – for instance, redeemable/non-redeemable rights to be assigned to the various classes of shareholders, as and when needed.
• Alphabet shares offer flexibility in terms of dividend payment rate which means a payment may be made to a specific share class without the need to pay the same rate to every other shareholder. Companies find this particularly beneficial if one or more of the shareholders are in a higher tax bracket, while the others are basic rate taxpayers or non-filers.

Alphabet Shares and Dividend Waivers: Additional considerations to keep in mind

• Any new shares created under the alphabet share scheme are considered a ‘gift’ and carry the same rights as the original ordinary shares. So, there can be no restrictions on these shares, for instance, “non-voting” or having lesser rights to capital or getting the shareholders to promise that the shares will be returned on demand. Therefore, the new shares cannot be made ‘redeemable preference shares.’
• It’s probably best not to create any alphabet shares right before a dividend is to be paid out or as soon as your company has posted large income reserves – because in this case, income transfer may be seen as being the sole reason for creating alphabet shares.
• If any shares are being gifted to spouses, it should ideally be shown that the spouse has vested interests in the functioning of the company – ideally, becoming Director at some point or, at the minimum, by assuming a formal role such as Administrator or Secretary. HMRC closely scrutinizes companies to ascertain where dividends are paid. A joint account would do just fine but all the while the account title must have the receiving spouse’s name.
• In order to cut down the risk as much as possible of HMRC making a claim that the dividends may not be paid unless at least one class of share was not allocated to any dividend, it is best that companies pay at least some dividend to every class of share.

When deciding on whether to use alphabet shares or dividend waivers, it is always best to consult a solicitor before allocating shares or paying dividends, especially when it comes to staying off HMRC’s radar and ensuring that your shareholders are given the right class of shares or dividends.

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