Considering taking out a director’s loan? This article covers how director’s loans work, when you might need one, and the risks involved when taking one out.

What is a Director’s loan?

A director’s loan is any money taken from your company that isn’t classified as salary, dividends, or a legitimate business expense – and it’s not money you previously put into the company. Simply put, it’s a loan from the business to the director.

A director can also become a company creditor, meaning they may lend money to the company as support, for example, during a low cash flow period.

When Would You Use a Director’s Loan?

A director’s loan can cover unexpected personal expenses, providing short-term access to funds beyond salary and dividends. Although this loan may provide relief during emergencies, it comes with risks, such as tax penalties, on top of an admin burden.

The director’s loan account (DLA) tracks all money borrowed from or lent to the company. If you owe more than you’ve put in, the account is overdrawn, which could raise concerns among shareholders and creditors. Keeping the DLA in credit or at zero is advisable.

Interest and Tax Implications

Your company sets the interest rate on a director’s loan, but if it’s below HMRC’s official rate (currently 2.25% for 2024/25), the discount could be considered a taxable benefit. The company must also pay National Insurance at 13.8% on the loan’s value.

There’s no legal cap on borrowing, but taking more than £10,000 automatically classifies the loan as a ‘benefit in kind,’ meaning it must be reported on your self-assessment tax return and could be subject to further tax.

Repayment Deadline and Corporation Tax

The loan must be repaid within nine months and one day after your company’s financial year-end to avoid a corporation tax charge (S455 tax) of 33.75%. If not repaid on time, interest will continue to accrue, and while you can reclaim the corporation tax once repaid, the interest is non-refundable.

Avoiding Common Pitfalls

Some directors try to avoid tax penalties by repaying a loan just before the deadline and then taking out a new one. HMRC views this as tax avoidance. Even if you wait 30 days before withdrawing funds again, it may still be flagged as an issue.

Accidental Director’s Loans

If your company declares a dividend without having sufficient profits, any payment made could be classed as an illegal dividend and treated as a director’s loan. This must be repaid within nine months to avoid penalties.

Lending Money to Your Company

Directors can also lend money to their company, which may help with business growth or cash flow. If you charge interest on the loan, it must be reported as personal income on your tax return, while the company can treat it as a business expense. The company must also deduct 20% tax at source.

Overview of Director’s Loans

• Only use director’s loans as a final resort.
• Repay within nine months and one day to avoid corporation tax charges.
• Borrow less than £10,000 where possible to avoid additional tax implications.
• If borrowing £10,000 or more, report it on your self-assessment and treat it as a benefit in kind.
• Wait at least 30 days before taking another loan to avoid tax avoidance concerns.
• Ensure your company has made a profit before declaring dividends.
• Keep accurate records and bookkeeping.

Get Accounting Advice

Director’s loans can offer financial flexibility but there are strict rules and tax consequences you must consider. Whether borrowing from or lending to your company, understanding the tax implications and repayment deadlines is crucial.

If you need guidance on managing director’s loans effectively, Whittaker & Co can help. Get in touch today to stay compliant and avoid unnecessary tax charges.

Read more – Director’s loans: Overview – GOV.UK

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