A director’s loan can be a useful way to move money between a director and their company. It can help a founder cover a short-term personal expense, inject cash into a business, or manage temporary differences between company income and personal withdrawals. But director loans are also one of the areas where small UK companies can accidentally create tax problems.

The key point is simple: money moving between a director and their company does not automatically count as salary or a dividend. If it is treated as a loan, it needs to be recorded properly and may have Corporation Tax, Income Tax or National Insurance implications. This guide explains how director loans work, what a director’s loan account is, when tax can arise, what happens if the loan is not repaid, and the mistakes company owners should avoid.

Important: Director loan rules can be complex, particularly where a company is closely controlled by its directors or shareholders. This article is for general information and should not be treated as tax or legal advice.

What Is a Director’s Loan?

A director’s loan is money that a director either takes from their company and owes back, or puts into the company and the company owes back to them, where the transaction is not treated as salary, dividends, expense reimbursement or another ordinary business payment. HMRC describes a director’s loan as money received from a company that is not salary, a dividend, expense repayment or money the director has previously paid or loaned to the company.

For example, imagine Sarah owns and runs a UK limited company. She transfers £20,000 of her personal savings into the company to help fund its launch. The company records this as money owed to Sarah. Later, the company has sufficient cash and repays £5,000 to her. That is generally a loan from the director to the company, rather than income to Sarah.

The opposite situation is more complicated. If Sarah takes £5,000 from the company for personal purposes and the amount is not salary, dividend or reimbursement of a business expense, she may owe that £5,000 back to the company. This creates a director’s loan account balance owed by Sarah.

What Is a Director’s Loan Account?

A director’s loan account, often abbreviated to DLA, is the accounting record of money moving between the director and the company. Think of it as a running ledger. It records transactions such as:

• Money the director puts into the company
• Money the company gives to the director as a loan
• Repayments made by the director
• Personal expenses paid by the company on the director’s behalf
• Certain business expenses initially paid personally by the director
• Interest charged on the loan
• Amounts that are later treated as salary or dividends

At the end of the company's financial year, the balance is reflected in the company's accounts. HMRC specifically requires companies to keep records of money borrowed from or paid into the company and to show amounts owed on the balance sheet.

The DLA can be in credit or overdrawn

There are two basic positions.

DLA in credit:
The company owes money to the director.

DLA overdrawn:
The director owes money to the company. For example:

The last position is where additional tax considerations can become important.

How Do Director Loans Work?

Director loans can operate in either direction.

When the director lends money to the company

This is generally straightforward. Suppose you establish a new ecommerce company and put £15,000 of your own money into its business bank account. If the money is recorded as a director's loan, the company owes you £15,000. When the company later has enough cash, it can repay the loan. The company does not pay Corporation Tax simply because you have loaned it money.

If you charge the company interest, however, the treatment is different. Interest paid by the company can generally be a business expense for the company, while the interest received is personal income for the director. The company may also have tax reporting obligations when paying the interest.

When the company lends money to the director

This is where greater care is required. Suppose a company transfers £8,000 to its director's personal bank account and the payment is not salary, dividend or reimbursement. If it is genuinely a loan, the director should owe the company £8,000. The company should record the transaction in the director's loan account and the director should repay it according to the agreed terms. If the loan remains outstanding, tax consequences can arise.

Are Director Loans Taxable?

Sometimes. The tax treatment depends on factors including:

• Who borrowed the money
• Whether the director is also a shareholder
• The amount outstanding
• How long it remains outstanding
• Whether interest is charged
• Whether the loan is repaid
• Whether the company is a close company
• Whether the loan is eventually written off

There are two particularly important areas to understand: beneficial loan rules and the Corporation Tax charge on loans to participators.

The £10,000 beneficial loan threshold

If you are a shareholder-director and the total value of relevant beneficial loans exceeds £10,000 at any point during the tax year, the loan may have to be treated as a benefit in kind. A beneficial loan is broadly a loan provided because of employment on favourable terms, such as an interest-free or below-market-rate loan.

Where the rules apply, the director may have to pay Income Tax on the benefit, while the company can have National Insurance and reporting responsibilities. The £10,000 threshold is important, but it should not be interpreted as a general rule that every loan below £10,000 is automatically tax-free. The circumstances of the loan still matter.

What Is Section 455 Tax?

For companies that fall within the close-company rules, loans or advances to shareholders and other participators can trigger a special Corporation Tax charge known as Section 455 tax. The purpose of this regime is to discourage owners of closely controlled companies from taking company funds as loans instead of receiving taxable income such as salary or dividends.

For accounting periods relevant from 6 April 2026, HMRC's current guidance states that the Section 455 rate is 35.75% for loans made on or after that date. This is an important 2026 change for company owners because older online articles may still quote the previous 33.75% rate.

When does the Section 455 charge arise?

Broadly, if a relevant loan remains outstanding nine months and one day after the end of the company's accounting period, the company may have to pay the Section 455 charge. For example, assume a company's accounting period ends on 31 December.

A relevant director loan remains outstanding after the deadline of 1 October following the end of the accounting period. The company may therefore have a Section 455 liability. The amount is normally dealt with through the company's Corporation Tax return, using form CT600A where required.

The Section 455 payment is not simply an additional permanent Corporation Tax cost in every case. When the relevant loan is subsequently repaid, released or written off in qualifying circumstances, the company can generally claim relief for the Section 455 tax. However, the timing of that relief can create a cash-flow issue, so directors should not treat the arrangement as cost-free.

What Happens If You Repay the Loan?

Repaying the director loan generally changes the tax position. If a relevant loan is repaid within nine months and one day after the end of the accounting period, the company may avoid the Section 455 charge for that accounting period. But there is an important anti-avoidance rule. A director should not simply repay a loan temporarily and immediately borrow the money again to make the balance appear cleared at the relevant date.

HMRC has specific rules addressing arrangements where a loan of more than £5,000 is repaid and another loan of £5,000 or more is made within the surrounding 30-day period. This is sometimes described as "bed and breakfasting" a director's loan. The lesson for founders is straightforward: don't rely on a last-minute temporary repayment strategy without professional advice.

Can a Director Borrow Money Interest-Free?

Potentially, yes, but an interest-free or low-interest loan can have tax consequences. Where a director or employee receives a beneficial loan because of their employment, the taxable benefit can broadly be based on the difference between interest calculated using HMRC's appropriate official rate and the interest actually paid.

There is an exemption where the combined outstanding value of relevant beneficial loans does not exceed £10,000 throughout the tax year, subject to the applicable conditions. This is why "it's only a small loan" is not always enough to determine the tax treatment.

Can a Company Write Off a Director Loan?

A company can, in certain circumstances, release or write off a director's loan, but doing so does not necessarily make the tax consequences disappear. HMRC states that when a loan to a participator is released or written off, the company may obtain relief from the Section 455 charge, while the amount written off can create a separate tax charge for the individual.

For employment-related loans, a written-off loan can also create an Income Tax charge for the recipient. In practical terms, writing off a director loan should never be treated as a simple accounting adjustment. The company should obtain appropriate accounting and tax advice before doing so.

What If the Director Dies or the Company Is Liquidated?

A director's loan does not simply disappear because the company's circumstances change. If the company is liquidated and the director owes money to the company, the liquidator can seek repayment because the money is an asset of the company. HMRC's guidance specifically notes that a liquidator can take legal action to recover money owed by a director.

This matters particularly for owner-managed businesses. A director may think of the company's bank balance as "their money", especially when they own 100% of the shares. Legally and financially, however, a limited company is a separate entity. Money belonging to the company cannot simply be treated as the owner's personal cash.

Director Loans vs Salary and Dividends

One of the most common mistakes is treating a director loan as an informal alternative to salary or dividends. They are not the same.

Salary

Salary is employment income and normally goes through PAYE, with applicable Income Tax and National Insurance obligations.

Dividend

A dividend is a distribution of company profits to shareholders and must meet the relevant company-law requirements.

Director loan

A genuine director loan is money that is expected to be repaid, or money previously provided by the director that the company owes back. The accounting treatment should reflect what the transaction actually is. If a director withdraws money and simply labels it "loan" even though there is no genuine intention or ability to repay it, that can create serious tax and accounting problems.

How Should You Keep Records of Director Loans?

Good record keeping is one of the simplest ways to avoid problems. Your company should maintain a clear director's loan account showing:

1. Date of each transaction
2. Amount received or paid
3. Purpose of the transaction
4. Whether the transaction is a loan, expense, salary or dividend
5. Repayments
6. Interest charged
7. Running balance
8. Supporting bank records and documentation

The balance should be reconciled regularly rather than discovered for the first time when annual accounts are being prepared. For a growing company, a monthly review is usually far better than waiting until year-end.

A Practical Example

Imagine David owns 100% of a UK software company. During the year, he withdraws £12,000 from the company for personal purposes. The withdrawals are not salary or dividends. His director's loan account therefore shows £12,000 owed to the company. David later repays £4,000, leaving £8,000 outstanding. Several questions now need to be considered:

• Is David a shareholder and director?
• Is the company a close company?
• When does its accounting period end?
• Will the remaining balance be repaid within the relevant period?
• Has the loan exceeded £10,000 at any point during the tax year?
• Was interest charged?
• Are the transactions properly recorded?
• Does Section 455 apply?

There is no single answer based only on the final £8,000 balance. The amount outstanding during the year and the timing of transactions can matter. That is why maintaining an accurate DLA throughout the year is so important.

Common Director Loan Mistakes

Treating company money as personal money

Owning the company does not mean the company's bank account is your personal account.

Recording personal withdrawals as business expenses

A personal purchase should not be disguised as a company expense simply to avoid dealing with a director loan.

Waiting until year-end

By the time the accounts are prepared, it may be much harder to correct an improperly managed loan account.

Ignoring the £10,000 threshold

The beneficial loan rules can create personal tax and employer reporting implications when the relevant threshold is exceeded.

Reborrowing immediately after repayment

Artificially clearing a loan and quickly borrowing again can trigger anti-avoidance rules.

Assuming repayment always removes every tax consequence

Repayment can affect the company's Section 455 position, but it does not necessarily erase other tax or reporting obligations that arose while the loan was outstanding.

Why Director Loans Matter for Global Founders

For founders living outside the UK, managing a UK limited company remotely can make the distinction between personal and company money even more important. International founders may use multiple bank accounts, payment processors and currencies while managing their business from abroad. Without clear bookkeeping, it can become difficult to determine whether a transfer was:

• A business expense
• A reimbursement
• A dividend
• Salary
• Money introduced by the director
• Or a director loan

Platforms such as IncorpUK are designed to help global founders manage the wider infrastructure surrounding a UK company, but directors should still obtain appropriate professional accounting advice for their individual tax position.

Frequently Asked Questions

Is a director's loan the same as a dividend?

No. A dividend is a distribution of company profits to shareholders, while a genuine director's loan is expected to be repaid or represents money the company owes to the director.

Can I take money from my company as a loan?

Yes, a company can make loans to directors in appropriate circumstances. However, the loan must be recorded correctly and can create tax, reporting and company-law obligations.

How long can a director's loan remain outstanding?

There is not a universal rule saying that every director loan must be repaid within a particular number of months. However, for relevant loans to participators in close companies, the nine-month-and-one-day rule is important because a Section 455 Corporation Tax charge may arise.

What is the £10,000 director loan rule?

Broadly, where a shareholder-director has relevant beneficial loans exceeding £10,000 at any point during the tax year, benefit-in-kind rules can apply. The exact tax treatment depends on the circumstances.

What is Section 455 tax?

Section 455 is a special Corporation Tax charge that can apply when a close company makes certain loans or advances to participators, including shareholder-directors. For loans made on or after 6 April 2026, HMRC's current guidance gives a rate of 35.75%.

Can my company lend me money interest-free?

It can in some circumstances, but an interest-free or low-interest loan can create a taxable benefit. The £10,000 beneficial-loan exemption may apply where its conditions are met.

What happens if my director loan is written off?

A written-off loan can have tax consequences for both the company and director. Section 455 relief may be available to the company, while the amount written off may be taxable on the individual.

Does a director loan have to appear in company accounts?

The company must account for money owed by or to a director appropriately. HMRC states that amounts owed at the end of the company's financial year should be included on the balance sheet.

Can a director lend money to their company?

Yes. A director can lend personal funds to their company. The company does not pay Corporation Tax simply because it receives the loan. If interest is charged, however, there are additional tax and reporting considerations.

Final Thoughts

Director loans are not inherently problematic. For many owner-managed companies, they are a legitimate and useful financial tool. The problem starts when a loan account is treated casually. The safest approach is to keep a clear record of every transaction, understand whether the balance is owed by the company or the director, distinguish loans from salary and dividends, and monitor the account throughout the year.

For shareholder-directors, particular attention should be paid to the £10,000 beneficial-loan threshold, the nine-month-and-one-day Section 455 deadline, repayment timing and anti-avoidance rules. Most importantly, remember that a limited company is legally separate from its owners. Good financial discipline means treating company money as company money and recording every movement accurately.

For complex or substantial director loans, professional accounting advice is worthwhile. A small amount of planning can prevent an apparently simple withdrawal from becoming an expensive tax and compliance problem.