Is Your Director's Loan Taxable? How HMRC Views Borrowing From Your Own Company
- MAZ
- 2 hours ago
- 10 min read
Is Your Director Loan Taxable? How HMRC Views Borrowing From Your Own Company
Running your own limited company creates a financial relationship that most employees never have to think about: you are simultaneously the person controlling company funds and a potential borrower of those same funds. Director loans, money taken from a company by its director beyond salary and dividends, sit in a uniquely awkward position in UK tax law. They are not automatically taxable, but they carry enough complexity that getting the detail wrong can trigger multiple tax charges at once.
This article explains what HMRC actually looks at, what the charges are, when they apply, and what directors should be thinking about before they draw money down, or before they file their next set of accounts.
What Counts as a Director Loan?
A director's loan account (DLA) is simply the running balance of money flowing between a director and their company that does not constitute salary, dividends, expenses reimbursements, or repayment of money the director has themselves lent to the company.
If you take £20,000 from your company bank account and it is not recorded as salary or an approved dividend, it sits in your DLA as a borrowing. HMRC does not care how the money was actually used, whether it funded a house purchase, a holiday, or a deposit on a car, the legal and tax treatment follows the nature of the transaction, not its purpose.
The DLA can run in either direction. If a director lends personal money to their company, the account is in credit. If they borrow from the company, it is overdrawn. The tax issues arise almost exclusively when the DLA is overdrawn, that is, when the company is owed money by the director.
The Two Main Tax Risks
Section 455 Corporation Tax Charge
This is usually the first charge directors encounter. Under section 455 of the Corporation Tax Act 2010, if a director's loan account remains overdrawn at the company's accounting year-end, and the loan has not been repaid within nine months and one day of that year-end, the company must pay a corporation tax charge on the outstanding loan balance.
From 6 April 2022 onwards, the rate is 33.75% of the outstanding amount. This aligns the charge with the higher rate of income tax on dividends, reflecting HMRC's view that directors might otherwise prefer to leave money in an overdrawn DLA rather than pay themselves dividends.
This charge is not a permanent tax cost in most cases. Once the loan is repaid, the company can reclaim the section 455 tax, but only after the end of the accounting period in which repayment was made, and it must be actively claimed via the company tax return or a separate claim. The repayment of section 455 tax is not automatic.
Worked example: A company's accounting year ends 31 March 2025. On that date, the director's loan is £40,000. Repayment is due by 1 January 2026. If the £40,000 is not repaid by that date, the company owes HMRC £13,500 (33.75% × £40,000) as a section 455 charge in addition to its normal corporation tax liability.
The timing matters more than many directors appreciate. HMRC has seen attempts to repay loans just before year-end and then immediately re-borrow the same sum. This practice, commonly called "bed and breakfasting", is specifically targeted by anti-avoidance rules at section 464A CTA 2010. If a director repays £30,000 within 30 days of the year-end and then re-borrows within 30 days, the repayment is ignored for section 455 purposes to the extent of any re-borrowing. The rules apply where repayments and re-borrowings exceed £5,000, so small fluctuations are not caught, but genuine large-scale repayments followed by swift re-drawing clearly are.
The Benefit in Kind: Interest-Free and Low-Interest Loans
The section 455 charge belongs to the company. Separately, the director faces a personal tax liability if the loan is interest-free or charged at a rate below HMRC's official rate.
Under the Employment Income (Benefits in Kind) rules, a loan to an employee or director is treated as a taxable benefit where it exceeds £10,000 at any point during the tax year. The benefit is calculated as the difference between the interest actually charged and what would have been payable at HMRC's official rate.
The official rate for 2025–26 is 2.25% (though this is reviewed periodically and has fluctuated in recent years, so directors with longstanding loans should check the current rate before filing). If a director borrows £50,000 from their company interest-free and the official rate is 2.25%, the notional interest is £1,125. That £1,125 is a taxable benefit in kind, reportable on a P11D and subject to income tax at the director's marginal rate, plus Class 1A National Insurance contributions by the company at 13.8%.
Note the £10,000 threshold carefully. It applies to the loan at any point during the tax year, not just at the year-end. If the loan peaked at £10,500 in July but had been repaid below £10,000 by April, the benefit in kind applies for the period when it exceeded the threshold.
If the company charges interest at or above the official rate, the benefit in kind disappears, but the interest received by the company is then income for corporation tax purposes, and the director may have deductible interest in limited circumstances.
What HMRC Actually Looks For
HMRC's approach to director loans is not simply mechanical. Compliance officers will look at the pattern of transactions rather than just the year-end balance.
Common red flags include:
Loans that never reduce. A director's loan that has been growing for several years and never shows meaningful repayment signals that the "loan" may in reality be a salary or dividend substitute. HMRC may seek to reclassify it, which could have PAYE and NIC implications extending back to the point of drawing.
Loans written off. If a company formally waives a director's loan, writes it off as irrecoverable, this triggers an income tax charge on the director under section 415 of the Income Tax (Trading and Other Income) Act 2005. The written-off amount is treated as a distribution and taxed accordingly. A write-off does not avoid the tax; it accelerates it and removes the option to repay and reclaim section 455 tax. Writing off loans in a company that subsequently enters insolvency also invites scrutiny from liquidators.
Loans post-dating insolvency or financial difficulty. Where a company is insolvent or approaching insolvency, drawing a director's loan is potentially a breach of the director's fiduciary duties and could constitute wrongful trading. This goes beyond HMRC's remit but is a real commercial risk that directors in distressed businesses sometimes underestimate.
Close Companies and the "Participator" Rules
Most small owner-managed limited companies are "close companies" under the tax definition, broadly, companies under the control of five or fewer participators, or in which participators hold the majority of distributable income. The section 455 charge applies to loans made to participators (typically shareholders) and their associates.
This matters because HMRC's reach extends beyond purely director-to-company loans. If a director who is also a shareholder makes a loan to an associate, say a spouse, civil partner, or adult child, that loan can also fall within section 455. The same applies to loans made by the company to another company in which the participator has a major interest. These extensions trip up even carefully run businesses where the directors are aware of the main rules but have not considered the associated persons provisions.
Should the Company Charge Interest?
Whether the company should charge interest on a director's loan is a genuine judgement call, and accountants give different advice on this. Charging interest at or above the official rate eliminates the benefit in kind and the Class 1A NIC liability, but it also:
● creates corporation tax income for the company on the interest received
● potentially requires the director to pay income tax on the interest if they are a higher-rate taxpayer and interest exceeds the Personal Savings Allowance (£500 for higher rate taxpayers from April 2021 onwards)
For many directors of small companies, the benefit in kind charge at their marginal rate is modest enough that the administrative simplicity of not charging interest outweighs the cost. But where loan balances are substantial, £100,000 or more, the arithmetic changes considerably.
Timing, Disclosure, and the P11D
Director loans above £10,000 must be reported on a P11D by 6 July following the tax year in which the benefit arose. This is one of the most frequently missed compliance steps. Many director-shareholders, particularly those running owner-managed businesses without a payroll bureau, either do not file P11Ds at all or file them without including the loan benefit.
HMRC has the power to assess benefits in kind going back up to four years where there was a failure to notify, or up to 20 years where the failure was deliberate. Given that director loan arrangements are typically visible in the company accounts, a late HMRC compliance check will identify them quickly.
The company's corporation tax return (CT600) also requires specific disclosure of loans to participators. Box 480 (section 455 tax) must reflect any outstanding loan, and omissions here are a relatively common basis for HMRC enquiry.
Practical Actions Directors Should Take
The basic compliance checklist looks like this:
● Ensure the DLA is reviewed at each year-end, ideally before, not after, the accounts are filed
● Set a calendar reminder for the nine-month-one-day repayment deadline following each accounting year-end
● If the loan exceeds £10,000 at any point during a tax year, make sure a P11D is filed by 6 July
● Understand the current official rate before calculating the benefit figure
● Avoid repaying and immediately re-borrowing without specific advice, the anti-avoidance rules are straightforward but still routinely misapplied
● If the loan is growing rather than reducing, consider whether the company structure and remuneration model needs reviewing
One point that surprises many directors: the section 455 tax is payable by the company, but it sits outside the normal corporation tax payment timeline. It is due nine months and one day after the accounting year-end, which aligns with the standard CT payment date for small companies, but it is separately assessed. A company that thinks it has no corporation tax liability because it made a loss may still have a section 455 liability on an outstanding loan.
Key Takeaways
● A director's loan is not automatically taxable as income, but failing to repay it within nine months of the company's year-end triggers a 33.75% corporation tax charge on the company.
● The director personally faces a benefit in kind charge if the loan exceeds £10,000 and carries no (or low) interest, this must be reported on a P11D.
● The section 455 charge is repayable once the loan is repaid, but the repayment of tax is not automatic and requires a specific claim.
● Anti-avoidance rules prevent artificial year-end repayments followed by rapid re-borrowing.
● Loans written off are taxed as distributions, they do not simply disappear from the tax picture.
● Associated persons and participators in close companies are caught by the same rules, not just the director personally.
● P11D disclosure is one of the most frequently missed compliance obligations in this area, and HMRC has power to go back four to twenty years where disclosure has been omitted.
Director loans are a legitimate and often sensible tool in the owner-managed business toolkit, but they require consistent administrative attention. The tax cost of getting this wrong is not trivial, and the options for retrospective remedy are more limited than many directors assume.
FAQs
1. What is a director's loan in a UK limited company?
A director's loan is money taken from a limited company by a director that is not treated as salary, dividends, reimbursed expenses, or repayment of money previously lent to the company. These transactions are recorded in the director's loan account (DLA). If the director owes money to the company, the account is considered overdrawn.
2. Is a director's loan taxable in the UK?
A director's loan is not automatically taxable. However, tax charges can arise if the loan remains unpaid beyond the permitted deadline or if the company provides the loan interest-free or at a below-market interest rate. Depending on the circumstances, both the company and the director may have tax liabilities.
3. What is the Section 455 tax charge on director's loans?
If an overdrawn director's loan is not repaid within nine months and one day after the company's accounting year-end, the company may have to pay a Section 455 tax charge. The charge is currently 33.75% of the outstanding loan balance, although it can usually be reclaimed once the loan has been fully repaid and the appropriate claim is made to HMRC.
4. When does a director's loan become a Benefit in Kind (BIK)?
A director's loan can become a taxable Benefit in Kind if it exceeds £10,000 at any point during the tax year and the company either charges no interest or charges interest below HMRC's official rate. The taxable benefit is based on the difference between the interest actually paid and the interest calculated using HMRC's official rate.
5. Does a director's loan need to be reported to HMRC?
Yes. Where an interest-free or low-interest director's loan creates a taxable benefit, it generally needs to be reported on a P11D by 6 July following the end of the relevant tax year. Companies may also need to disclose outstanding loans to participators on their Corporation Tax Return (CT600).
6. Can a company reclaim Section 455 tax after the loan is repaid?
Yes. Section 455 tax is generally refundable once the director has repaid the outstanding loan. However, the repayment is not automatic. The company must submit the appropriate claim to HMRC after the end of the accounting period in which the repayment occurred.
7. What is 'bed and breakfasting' for director's loans?
'Bed and breakfasting' refers to repaying a director's loan shortly before the repayment deadline and then borrowing the same or a similar amount again soon afterwards. HMRC has anti-avoidance rules designed to prevent this practice, meaning certain repayments may be ignored when calculating the Section 455 tax charge.
8. What happens if a company writes off a director's loan?
Writing off a director's loan does not eliminate the tax consequences. In many cases, the amount written off is treated as a distribution for tax purposes and may create an income tax liability for the director. It can also affect the company's ability to recover any previously paid Section 455 tax.
9. Do loans to family members of directors fall under the same tax rules?
Potentially, yes. For close companies, loans made to certain associates of participators, such as spouses, civil partners, or adult children, may also fall within the scope of the Section 455 rules. Directors should seek professional advice before making loans involving connected persons.
10. How can directors avoid unexpected tax charges on director's loans?
Directors should regularly review their director's loan account, repay outstanding balances before the nine-month repayment deadline where possible, monitor whether the loan exceeds the £10,000 Benefit in Kind threshold, file any required P11D forms on time, and avoid artificial repayment arrangements that could trigger HMRC's anti-avoidance rules. Professional tax advice can help ensure ongoing compliance.
About the Author
Maz Zaheer, AFA, MAAT, MBA, is the CEO and Chief Accountant of MTA and Total Tax Accountants, (Registered with Companies House) two premier UK tax advisory firms. With over 15 years of expertise in UK taxation, Maz provides authoritative guidance to individuals, SMEs, and corporations on complex tax issues. As a Tax Accountant and an accomplished tax writer, he is renowned for breaking down intricate tax concepts into clear, accessible content. His insights equip UK taxpayers with the knowledge and confidence to manage their financial obligations effectively.
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