As chartered accountants working closely with business owners and directors, we frequently field questions about director’s loans.

Whether you’re considering borrowing from your company or lending to it, understanding the implications and regulations surrounding director’s loans is crucial for maintaining compliance and avoiding costly mistakes.

Understanding Director’s Loans

A director’s loan occurs when you take money from your company that isn’t:

• A salary or dividend payment
• Legitimate expense reimbursement
• Money you’ve previously paid into or loaned to the company

Similarly, when you lend personal funds to your company (outside of buying shares), this creates a director’s loan in the opposite direction.

Essentially, a director’s loan is money that you, as a director, borrow from your company and will eventually have to repay. This is common when covering short-term expenses, navigating start-up costs or managing cash flow, with a loan making the director one of the company’s de facto creditors.

These loans are quite risky and complex, posing potential tax liability penalties if not carefully considered, which is why we recommend caution before proceeding with a director’s loan.

The Director’s Loan Account (DLA)

Every limited company must maintain a director’s loan account, which tracks all transactions between the director and the company. This account can be:

• In credit (company owes the director)
• At zero (balanced)
• Overdrawn (director owes the company)

Maintaining accurate records of your DLA is essential for tax compliance and company reporting to shareholders. It’s always wise to ensure the DLA amount is either at zero or in credit wherever possible.

Tax Implications and Charges

Section 455 Tax

One of the most significant considerations with director’s loans is Section 455 tax (corporation tax) charges.

If your loan remains unpaid for nine months and one day after your company’s year-end, HMRC will charge corporation tax at 33.75% on the outstanding amount. Interest will also be added until the tax charge is paid or the loan is repaid.

While this tax is refundable once the loan is repaid (minus the interest), the process can be lengthy and complex.

Benefits in Kind (BiK)

Loans exceeding £10,000 are considered a benefit in kind and must be:

• Reported on your self-assessment tax return
• Subject to personal tax based on the official interest rate
• Included on your P11D form
• Subject to Class 1A National Insurance contributions at 13.8% on the full value (rising to 15% in April 2025) from the company.

Interest Considerations

While companies can choose their own interest rates for director’s loans, if the rate is below HMRC’s official rate (currently 2.25% for 2024/25), you may face additional tax charges on the difference.

Best Practices for Managing Director’s Loans

Documentation Requirements

Maintain comprehensive records including:

• Written agreements detailing loan terms
• Regular DLA statements
• Board meeting minutes approving significant loans
• Shareholder approvals where required

Repayment Strategies

Consider these approaches to managing repayments effectively:

• Plan dividend payments to clear overdrawn accounts
• Structure regular repayment schedules
• Keep track of approaching deadlines
• Maintain a clear separation between personal and business finances

Common Pitfalls to Avoid

1. “Bed and Breakfasting”
   HMRC closely scrutinises the practice of repaying loans just before the nine-month deadline only to reborrow shortly after. A minimum 30-day gap between repayment and new borrowing is required, though even this may be challenged.
2. Illegal Dividends
   Taking dividends when your company lacks sufficient distributable profits automatically creates an overdrawn director’s loan account. Regular management accounts can help prevent this situation.
3. Poor Record-Keeping
   Inadequate documentation can lead to disputes with HMRC and difficulties in proving loan terms or repayments.

When to Consider a Director’s Loan

Director’s loans can be useful in specific circumstances:

• Managing short-term cash flow needs
• Funding unexpected personal expenses
• Supporting company growth through director investment
• Managing seasonal business fluctuations

However, they shouldn’t be used as a routine financing method due to their complex nature and potential tax implications.

Consult Tax Advisors and Accountants for Best Results

Given the complexities surrounding director’s loans, professional advice is crucial. At Hamlyns, we help directors structure loans appropriately, maintain compliant documentation, plan tax-efficient repayment and cash flow strategies and help our clients navigate changing HMRC guidelines.

If you’re considering a director’s loan or need help managing an existing one, our team of chartered accountants can provide the guidance you need. Contact Hamlyns today to discuss your specific situation and ensure you’re making informed decisions about your company’s finances.