If you run a limited company, you will almost certainly have a director's loan account, whether or not you know it by that name. Used carelessly, it can lead to extra tax for both you and the company.
This post explains what it is and how to avoid the tax charges.
What a director's loan account is
A director's loan account records money that moves between you and your company, other than:
salary
dividends
repayment of business expenses you paid personally
If you take money out, the account is overdrawn: you owe the company. If you put money in, it is in credit: the company owes you.
You must keep a record of every amount, and show the balance in your company's annual accounts.
If the company owes you
This is the simple case. The company can repay money you lent it without any tax. If the company pays you interest on the loan, the interest is taxable income for you and a cost for the company. The company deducts basic rate tax from the interest and pays it to HMRC.
If you owe the company: the loan charge
Most small owner-managed companies are "close companies". If you are a shareholder (or connected to one) in a close company, and you still owe it money 9 months after the end of its accounting year, the company has to pay an extra tax charge on the amount outstanding.
For loans made on or after 6 April 2026, the charge is 35.75% of the loan.
For loans made between 6 April 2022 and 5 April 2026, it is 33.75%.
The company can claim this tax back once the loan is repaid, written off or released. The refund isn't paid until 9 months and 1 day after the end of the accounting period in which that happens, so the money can be tied up for a long time.
Example. A company's year ends on 31 March 2027. The director owes it £20,000 at that date. If the loan is still outstanding when the company's Corporation Tax is due on 1 January 2028, the company pays a charge of £7,150 (35.75%) with it.
Loans over £10,000
If your loans from the company total more than £10,000 at any point in the tax year, and you pay no interest or less than HMRC's official rate (3.75% at the time of writing; HMRC can review it during the year), the loan is a benefit in kind.
You pay Income Tax on the benefit through your tax return.
The company pays Class 1A National Insurance on it and reports it to HMRC, usually on form P11D.
Writing the loan off
If the company writes off or releases the loan, you pay Income Tax on the amount through Self Assessment. The company also has to deduct Class 1 National Insurance through payroll.
Repaying and borrowing again
Repaying the loan just before the deadline and then taking the money straight back out doesn't work. The loan charge still applies if:
you repay £5,000 or more and borrow £5,000 or more again within 30 days, or
at least £15,000 is owed when you repay, and a new loan of £5,000 or more is already planned
How to keep it under control
Check your loan account balance every month, along with your bookkeeping.
Pay personal costs from your personal account. Every personal payment from the company account adds to what you owe.
Take money out as salary or dividends where you can. Dividends must be declared properly and paid from profits the company has available.
Plan before the year end. If the account is overdrawn, decide with your accountant how and when it will be cleared.
Summary
Having a director's loan account is normal. The tax charges arise when you owe the company money for too long or the loan is large. Keep the balance under review and clear it within 9 months of the year end.
If you would like us to review your director's loan account, book a call or contact us.