For many business owners, borrowing money from their company can seem like an easy and tax-efficient solution.
After all, why pay bank interest rates when you can simply take money from your own business?
But director’s loans can quickly become far more expensive than many people realise — especially if the loan isn’t repaid on time.
In some cases, both the company and the director can face additional tax charges, benefit-in-kind implications and cash flow problems.
What Is a Director’s Loan?
A director’s loan happens when a director:
- Takes money from the company that isn’t salary, dividends or expenses
- Borrows funds from the business personally
This creates what’s known as a Director’s Loan Account.
While short-term borrowing can sometimes work well, problems often arise when the balance remains outstanding for too long.
The Company Tax Charge You Need to Know About
If the loan is not repaid within:
- Nine months and one day after the company’s accounting year end
…the company may face an additional tax charge under the Section 455 rules.
The charge is currently:
- 35.75% of the outstanding loan balance
That’s a significant amount.
Why Does This Tax Charge Exist?
Without these rules, directors could potentially take money from companies indefinitely without paying:
- Income Tax
- Dividend Tax
- National Insurance
The Section 455 charge is designed to prevent this.
Is the Tax Charge Permanent?
Technically, no.
The company can usually reclaim the tax once the loan is:
- Repaid
- Written off
However, there’s an important catch.
The refund often isn’t received until:
- Nine months and one day after the end of the accounting period in which the loan is cleared
This delay can create serious cash flow issues for the company.
Directors Can Face Their Own Tax Charges Too
Separate rules apply personally to the director.
If the director’s loan balance exceeds:
- £10,000 at any point during the tax year
…the loan may become a taxable benefit in kind.
This is known as a beneficial loan.
How the Benefit in Kind Rules Work
HMRC treats low-interest or interest-free loans as a taxable benefit.
The benefit is calculated using HMRC’s official interest rate, currently:
- 3.75%
The director then pays Income Tax on the benefit at their marginal tax rate.
At the same time:
- The company pays Class 1A National Insurance at 15%
This applies even if the loan is eventually repaid.
Can You Avoid the Benefit in Kind Charge?
Potentially, yes.
The benefit charge can usually be avoided if:
- The company charges interest at HMRC’s official rate or higher
Even if the interest is added to the loan balance rather than physically paid immediately, this may still help prevent the tax charge.
Repaying the Loan Isn’t Always Simple
Many directors assume they can simply clear the loan later with:
- Dividends
- Bonuses
- Personal funds
But each option comes with consequences.
Using Dividends
This often creates:
- Dividend tax liabilities
Using Bonuses
This may trigger:
- Income Tax
- National Insurance
Using Personal Borrowing
Some directors take out:
- Personal loans
- 0% credit cards
…to clear the director’s loan account.
This can work in some situations, but it still creates borrowing costs and requires careful planning.
Is Borrowing From Your Company Ever Tax Efficient?
In some short-term situations, yes.
For example:
- A basic rate taxpayer expecting a dividend shortly after year end may benefit from temporary borrowing
However, using a director’s loan as a long-term source of finance is rarely tax efficient.
Once:
- Section 455 tax
- Benefit in kind rules
- Dividend tax
- Cash flow implications
…are taken into account, the “cheap” loan can quickly become expensive.
Planning Ahead Is Essential
Director’s loans are an area where small mistakes can create surprisingly large tax bills.
Good planning can help:
- Avoid unnecessary tax charges
- Manage cash flow
- Structure withdrawals more efficiently
- Prevent unexpected HMRC issues later on
Need Advice on Director’s Loans or Taking Money From Your Company?
Understanding the most tax-efficient way to extract profits from your business is essential for company directors.
At Jon Davies Accountants, we help business owners across Liverpool and the UK plan director remuneration carefully and avoid costly tax traps.
If you’ve borrowed from your company — or are considering doing so — get in touch with Jon and the team today for practical, straightforward advice.
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Any questions?
If you’d like a meeting or a video call to discuss this, please get in touch with your favourite Liverpool accountant
- You can ring us on 0151 380 8080
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