If you’re a director thinking about borrowing money from your company (or lending money to it), you might find this article useful.
I wanted to address these loans because while they offer flexibility, they also come with some significant tax strings attached.
For those that don’t know, a directors' loan is exactly what it says on the tin: money you borrow from or lend to your company that isn’t salary, dividends, or expense reimbursements.
HM Revenue & Customs (HMRC) takes a keen interest in these transactions because they can sometimes be used as a way of avoiding tax.
If you lend money to the company, it’s still a directors' loan – just with different tax implications.
A brief explanation of Directors’ Loan Accounts
Whether you are borrowing money, or loaning the company money, it all gets tracked through your Directors’ Loan Account (DLA).
The DLA is like a financial diary, recording every penny you and the company exchange.
It can either be:
- In credit – The company owes you money. Maybe you loaned it some cash to help with cashflow.
- Overdrawn – You owe the company money because you dipped into its funds.
Unfortunately, when your DLA is overdrawn, it tends to be more complicated than the other way around.
Here’s why…
1. Section 455 Corporation Tax
If your loan isn’t paid back within nine months of the company’s accounting year-end, the company will be hit with a hefty 33.75 per cent tax on the outstanding balance.
However, the company can reclaim this tax once you repay the loan.
The bad news is that it could take ages to get that refund.
2. Benefit-in-kind (BIK)
If your loan goes over £10,000 at any point in the tax year, and you’re not paying at least HMRC’s official interest rate (currently 2.5 per cent for 2025), HMRC considers it a benefit-in-kind.
This means:
- You pay Income Tax on the benefit.
- The company pays Class 1A National Insurance.
Suddenly, that “cheap” loan isn’t looking so cheap anymore.
3. Writing off a loan
If your company decides to forgive the loan, it’s treated as income.
You’ll pay Income Tax on it at dividend rates, and the company can’t deduct the written-off amount as an expense.
How to repay a directors' loan
Repaying an overdrawn loan means you’ll likely avoid tax liabilities, but the repayment must be genuine.
HMRC scrutinises cases where directors repeatedly take out loans and repay them just before the deadline (a practice known as "bed and breakfasting").
To prevent this, any repayment accompanied by another loan within 30 days—whether the loan precedes or follows the repayment—is treated as a continuation of the original loan.
Repaying a loan on a permanent basis within nine months of the end of the accounting period in which it was taken out will negate any Section 455 charge.
Repayments are often made by declaring a dividend that is immediately credited to the loan account, which may be possible provided the company has sufficient distributable reserves.
Such dividends will of course be subject to Income Tax in the hands of the shareholder(s).
What if you can’t repay an overdrawn directors’ loan?
Failing to repay an overdrawn directors' loan has significant consequences.
Aside from the tax consequences discussed above, it is important to appreciate that should the company get into financial difficulty and be put into administration, a liquidator could pursue the director(s) for recovery of the outstanding loans.
This could put the director(s) personal assets at risk.
How to manage directors' loans without losing sleep
Directors' loans aren’t inherently bad, but they do require careful management.
If you’re dipping into company funds, make sure:
- You have a plan to repay the loan. Avoid “bed and breakfasting” (repaying just to re-borrow within 30 days), as HMRC is wise to that trick.
- Your company has enough distributable reserves. Declaring a dividend to repay the loan can be a smart move, but only if the company’s finances allow it.
- You keep crystal-clear records. A well-maintained DLA can save you from headaches during tax season.
Directors' loans might seem like a quick and easy way to access cash but, as you can see, the tax implications can be a nightmare if you don’t know what you’re doing.
That’s why we work closely with our corporate clients to help them navigate the rules and avoid unnecessary costs.
After all, the goal is to take advantage of this financial tool – not get burned by it.
