A directors loan is money you take from your limited company that is not a salary, a dividend, or an expense repayment. Every directors loan must be logged in a directors loan account. Repay it within nine months and one day of your company year-end, or your company faces a Section 455 tax charge.
- Money withdrawn outside salary, dividends, or expense claims counts as a loan.
- Every transaction sits in your directors loan account and shows on the balance sheet.
- Miss the nine-month-and-one-day deadline and Section 455 tax applies at 35.75%.
- Balances above £10,000 become a benefit in kind, with Class 1A NI at 15%.
- HMRC’s official rate of interest is 3.75% for 2026/27.
What Is A Directors Loan?
GOV.UK describes it as money you, or a close family member, take from the company that is not a salary, dividend, expense repayment, or cash you previously lent the business. Your company is a separate legal entity, so its bank balance belongs to the business, not you. Anything drawn outside those routes is borrowing, and HMRC expects its share.
Who Is Eligible To Take One?
The clue sits in the name: you must be a director of the company. The Gazette adds a twist for close companies, which are firms controlled by five or fewer participants or by any number of participants who are also directors. If such a company pays your family, friends, or business partners, those payments belong in your loan account too.
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How Do Directors Loans Work?
Money flows both ways. Put personal funds in and the account is in credit, so the company owes you. Take funds out and it turns overdrawn.
Typical entries include cash withdrawals, personal bills paid by the company, and business costs you covered yourself. Drawings taken against a dividend not yet declared also count as a loan until that dividend is voted through.
Directors Loan Account: Your Paper Trail
A directors loan account, sometimes called a director’s current account, is the ledger of these transactions, and each director needs their own. At year-end, the balance appears in your annual accounts as either an asset or a liability.
Section 413 of the Companies Act 2006 demands disclosure of loans and advances made to directors, including amounts, interest rates, and any sums written off. DNS Associates points out that HMRC staff are told to examine directors’ personal expenses during an enquiry, so sloppy records invite trouble.
Tax On An Overdrawn Account
| Situation | What the company pays | What you pay |
|---|---|---|
| Cleared within 9 months and 1 day | Nothing, but declare on CT600A | Nothing |
| Still outstanding after that date | Section 455 tax, plus interest until settled | Nothing |
| Balance over £10,000 at any point | Class 1A NI at 15% on the benefit | Income Tax on the P11D benefit |
| Loan written off or released | Class 1 NI through payroll | Income Tax at dividend rates |
Table Source: HM Revenue & Customs (HMRC) — Official Directors Loans Guidance (GOV.UK)
Section 455 tracks the dividend upper rate. It is 35.75% for loans made on or after 6 April 2026, 33.75% for loans made between 6 April 2022 and 5 April 2026, and 32.5% before that. For example, if a qualifying £15,000 loan is made in May 2026 and remains subject to Section 455, the 35.75% charge would be £5,362.50.
The charge is refundable once the loan is repaid, released or written off. Relief falls due nine months and one day after the period of repayment, with a four-year claim window. Use CT600A within two years, form L2P after that. Interest on it is never repaid.
Interest On Overdrawn Directors Loan Account
You and your company can agree on any rate, including none at all. The catch is HMRC’s official rate, set at 3.75% for 2026/27 and now reviewed quarterly rather than fixed for the year.
Top £10,000 at any moment while paying less than that rate, and the discount becomes a benefit in kind. The company reports it on a P11D and pays Class 1A NI at 15%, while you declare it on Self Assessment. The tax planning accountant stresses that charging the official rate removes the P11D duty entirely.
Bed And Breakfasting
Repaying a loan just before year-end and taking the cash straight back is a trick HMRC has closed off. Where £5,000 or more is repaid and a similar sum withdrawn within 30 days, relief is denied. Balances over £15,000 are caught by a wider arrangements rule.
When You Lend Money To Your Company
Lending works the other way round. Your company pays no corporation tax on funds you lend it, and you can withdraw them any time. Charge interest, and it becomes a deductible expense for the company and taxable income for you.
The company pays that interest less 20% basic rate income tax and then reports it quarterly on form CT61. One warning: unless the loan secures a charge over company assets, insolvency will leave you as an ordinary unsecured creditor.
Risks Worth Knowing
SG Accounting records a client who withdrew £8,000, assuming it was personal cash. Nothing was logged, the account fell overdrawn, and a Section 455 charge followed, cleared only by dividends declared before the deadline.
Crunch flags a second danger: where an account is repeatedly overdrawn or replaces wages, HMRC may treat the withdrawals as salary and charge income tax and NI. Should the company fail, a liquidator can pursue the balance.
ALSO READ: What Are The UK Tax Brackets For 2025/26: How Much Income Tax Will You Pay?
FAQs
Q1. Is A Directors Loan Taxable?
Not automatically. Repay within nine months and one day of your year-end, and no Section 455 charge arises. Balances above £10,000 still create a benefit in kind.
Q2. How Much Can A Director Borrow?
There is no statutory limit. Anything above £10,000 needs shareholder approval and brings P11D reporting.
Q3. What Happens If I Cannot Repay The Loan?
Declare a dividend to clear it if distributable profits exist. Otherwise, repay in instalments and reclaim the Section 455 tax later.
Q4. Can A Directors Loan Be Written Off?
Yes, with shareholder approval. The written-off sum is taxed on you as a distribution, and the company deducts Class 1 NI through payroll.
Q5. Do I Pay Interest On A Directors Loan?
Only if you agree to. Charging the official 3.75% rate removes the benefit in kind and the P11D paperwork.
Q6. Does HMRC Monitor Directors’ Loan Accounts?
Yes, through your annual company tax return. Regularly overdrawn accounts attract scrutiny, especially where the pattern resembles disguised salary.
Sources & References
- HM Revenue & Customs. (2026). Directors’ loans: Taking money out of a limited company. GOV.UK.
- SG Accounting. (2025). Directors’ loans explained: The complete guide for limited company directors.
- DNS Associates. (2025). Complete guide to directors’ loan accounts.
- The Gazette. (2024). Directors’ loans and the responsibilities of company directors.
Disclaimer: This article is provided strictly for general informational and educational purposes only and does not constitute financial, legal, tax, or professional accounting advice. It is not intended for promotional purposes or as a substitute for consulting with a qualified tax advisor or financial consultant. Readers should independently verify all facts, tax rates, and regulatory requirements and seek appropriate professional advice before making any financial decisions or taking action based on the content herein.
