If you’re a contractor working through your own company, you might think there wouldn’t be a problem if you borrowed money from or loaned money to your business from time to time, as long as it’s paid back.
Sadly, it’s not quite as simple as that, and loaning money to and from your company can carry additional tax implications. With this in mind, it’s essential that you’re fully aware of your options and obligations should you decide to make use of what’s known as a director’s loan.
A director’s loan is either money borrowed from the company by one of its directors or money loaned to a company from a director personally.
To help you avoid any slip-ups, in this article, we set out all of the key information on director’s loans.
Loaning money to your company
Sometimes you may need to lend your company personal money to boost your cash flow. For example, you might have just started your company and need money in your business account to cover set-up costs.
Any money you lend to your limited company will sit as a credit in your directors’ loan account as money owed by the company to you. When your company has enough profit and cash in the company to be able to repay the loan to you, you can just withdraw it from the company without any tax implications.
Borrowing money from your company
More commonly, we refer to a director’s loan, or loan to participator, when money has been borrowed from a company and this is what we will cover in the rest of this guide.
HMRC defines a director’s loan as money taken from a company that is neither:
- A salary, dividend or expense repayment
- Money you’ve previously paid in or loaned to the company
There are strict rules around taking a director’s loan. So, it’s essential to understand how they work and what your legal responsibilities are when loaning or borrowing money.
It’s important to note that as well as loans to directors, the rules apply equally to any party connected to the company (a participator) who borrows money from the company.
You may wish to borrow money from the company for such reasons as an unexpected bill or to help to ease personal financial issues, however a director’s loan is not always the result of having decided to take a loan from the company.
What is a director’s loan account?
A director’s loan account (DLA) is a ledger of transactions made between any director and the company, and a record of what’s owed in each direction.
All payments due to the director such as salary, dividends and expenses will be credited to this account as amounts owing to the director and all payments to the director will be debited to this account thereby reducing the amount that is owed to the director.
If a director pays themselves more than they are owed this will leave a debit balance within the company accounts. The director will “owe” the company the balance and so this becomes known as a Director’s Loan.
There’s no upper or lower limit on your loan amount. But make sure you have the profit or cash available to borrow money that hasn’t already been earmarked for other liabilities, such as your company’s Corporation Tax bill. Needless to say, HMRC could take a dim view if you can’t make any tax payments on time, particularly if you’ve taken a loan personally from your business
Director’s loan tax
There are two types of tax charges which you may incur when using a director’s loan, depending on the amount borrowed and the length of time the loan is outstanding. These are the S455 charge and the BIK charge.
S455 Tax Charge
Whatever the value of your loan, if you repay it in full before nine months and one day after your company year end in which you took out the loan, there won’t be any S455 tax implications.
If you haven’t repaid the loan in full within this time, any loan taken in the company year and still outstanding nine months and one day after your company year end will be subject to a S455 tax charge.
This is currently chargeable at 35.75% of the outstanding value of the loan at that time, and is the equivalent of what you would have paid in tax had you declared the loan as a dividend at the higher rate tax band.
S455 tax is a temporary tax though, and so unlike when declaring dividends – where you’ll pay a permanent higher tax – once you’ve repaid your director’s loan in full, you can reclaim the S455 tax back from HMRC, and our accountants here at Caroola will help you do this.
BIK Charge
Along with S455, if the total value of your loan exceeds £10,000 in a year, then you may also incur a Benefit in Kind (BIK) charge.
A Benefit in Kind (BIK) is a benefit that employees or directors receive from a company which is separate from their salary. Because these benefits have a monetary value, whether a car or, in this case, a director’s loan, they’re treated as taxable income.
The benefit in kind arises if the loan is a ‘beneficial loan’ i.e. the interest charged on the loan is below the official interest rate as set by HMRC (currently 3.75% for 2026/27). The benefit in kind value is equivalent to the official rate of interest on the loan less any interest paid by the employee (or director) to the company during the year.
The tax payable by the recipient of the loan will be at their marginal rate i.e. 20/40/45% on the benefit in kind value once calculated on the P11D and the company will also pay Class 1A National Insurance on this value at a rate of 15%.
Paying interest on a director’s loan
An alternative to this is to pay interest to the company at the official rate of interest in which case the loan would not be considered ‘beneficial.’ The interest would need to be paid to the company on an annual basis for as long as the loan is outstanding.
If you’re confused or want to find out if paying interest or the BIK charge is better for you, don’t hesitate to contact us.
How to repay a director’s loan
There are a few ways to repay a director’s loan taken by a director:
- Repayment by cash – physically pay the money back into your company from your personal funds.
- Repayment from salary – don’t withdraw the salary owed to you as per your payslip, but use it to reduce the balance of the director’s loan.
- Repayment from dividend – reclassify some or all of the loan as paid by declaring a dividend.
Whichever method you choose, remember to keep a record of how and when the payment was made, via your DLA.
Is there anything else to add?
Like any financial borrowing, it’s essential to repay any loans on time. Too much money loaned out for too long may become a cause of concern for other directors or creditors (if your business has either).
The timing of repaying loans and taking another in quick succession also needs considering, as HMRC have a ‘Bed and Breakfasting’ rule. This has implications for loans repaid, with another taken out within 30 days. Under this rule, the repayment is not seen as repaying the original loan, only the new one, and so potentially leaving you with tax to pay on the original loan.
To recap, director’s loans give you the freedom to borrow from or loan money to your company. Provided the loan is repaid within nine months and one day of the company’s financial year-end – and does not total more than £10,000 in the year – you won’t accrue further tax or interest charges.
While director’s loans can be complex, the proper support will help ensure you use them in the right way. For more information or any other accounting support, please get in touch with one of our experts, who will be delighted to answer any questions you have.