What Is a Director’s Loan and How Does It Work?

If you’re a limited company director, you’ve probably heard the term “director’s loan” – but what does it actually mean, and how does it affect you and your business?

In simple terms, a director’s loan is any money taken from or put into the company by a director that isn’t:

• Salary, wages or bonuses

• Dividends

• Expense repayments

• Money you originally put in as share capital

So, if you take money out of the company that doesn’t fall into those categories, HMRC will usually treat it as a director’s loan.

Two Main Situations

1. You Owe the Company Money (Overdrawn Director’s Loan Account).

This happens when you take more out of the company than you’ve put in.

Example:

• You put £5,000 into the company to help with cash flow.

• Later, you take £10,000 out for personal use.

• Net position: you owe the company £5,000.

This is called an overdrawn director’s loan account.

Key points to know:

• It’s not your money – it belongs to the company.

• If the loan is over £10,000 at any point in the year, it usually needs to be:

  • Approved by shareholders, and

  • Treated as a benefit in kind, which can create extra tax and National Insurance.

• If the loan is not repaid within 9 months of the company’s year end, there can be additional tax consequences for the company.

2. The Company Owes You Money (You’ve Lent Money to the Business).

This is the opposite situation: you’ve put your own money into the company and not taken it back yet.

Example:

• You pay £8,000 of business costs from your personal account.

• The company now owes you £8,000.

In this case:

• Your director’s loan account is in credit.

• The company can repay you when cash allows, without extra tax, as long as it’s genuinely a repayment of money you’ve lent or expenses you’ve covered.

• In some cases, the company may even pay you interest on this loan, but that has its own tax and reporting rules.

How Are Director’s Loans Taxed?

The tax treatment depends on the position of your director’s loan account.

If Your Loan Account Is Overdrawn.

1. Company tax (s455 charge)

   
   

   If you still owe the company money 9 months after the year end, HMRC will charge Section 455 Corporation Tax at 33.75% on the loan amount, as well as interest, until the Corporation Tax is paid.

   This Section 455 tax can usually be reclaimed by the company once the loan is fully repaid, but in the meantime it ties up cash and increases your overall tax cost.

   
   

2. Benefit in kind (if over £10,000)

   
   

   If the loan is more than £10,000 at any time and you’re not paying a commercial rate of interest, HMRC may treat it as a benefit in kind.

   
   

   That means:

   • You may pay income tax on the benefit.

   • The company may pay Class 1A National Insurance on it.

     
     

3. Writing off a director’s loan

   
   

   If the company writes off (forgives) your loan, HMRC can treat this as income for you, which can be taxable like a dividend or salary, depending on the circumstances.

If the Company Owes You Money.

• When your loan account is in credit, there’s usually no extra tax just for repaying you.

• If the company pays you interest on the loan:

  • You may pay tax on the interest personally.

  • The company may have to deduct basic rate tax and report it to HMRC.

In our next blog we will be talking about the common mistake directors make when having a directors loan.