When a company pays interest it may, in certain situations be obliged to withhold tax at source and pay it over to HMRC. The rate of tax to be withheld is the basic rate (currently 20%). As HMRC is only concerned to collect tax that may otherwise be difficult to chase, there are various exemptions and reliefs from the requirement to withhold. Where a payment falls within these exemptions / reliefs the payment can be made gross.

Payments made net

As mentioned above companies will have to withhold tax at source (at 20%) on certain interest payments and pay the tax over to HMRC. The main instances where companies may have to deduct income tax at source from interest are:

  • payments of yearly interest to individuals - 'short' interest payable on loans in place for a period of less than 12 months is generally outside the scope of the rules
  • payments of yearly interest to overseas companies
  • payments of yearly interest to partnerships and hybrid entities

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