If you’re a company director, you may have heard of a director’s loan—a way to borrow money from your company when cash flow is tight. On the surface, it can seem convenient, but without careful management, it can lead to serious tax issues. HMRC treats director’s loans seriously, with rules to prevent tax avoidance.
This guide will explain what director’s loans are, how they affect tax compliance, the anti-avoidance rules you need to know, and best practices for managing your Director’s Loan Account (DLA) responsibly. By following these steps, you can access company funds without risking penalties.
What Is a Director’s Loan?
A director’s loan occurs when a director borrows money from their company outside of their salary, dividends, or reimbursed expenses. Think of it as taking an IOU from your own business for personal or business purposes.
This type of loan isn’t illegal, but it’s important to:
- Record the transaction in your Director’s Loan Account (DLA)
- Understand repayment timelines
- Recognize potential tax implications
Common examples include borrowing for a personal emergency, a holiday, or to cover temporary cash flow gaps.
Tax Implications of Director’s Loans
Director’s loans have several tax consequences if not handled correctly:
- https://macmanusassetfinance.co.uk/blog/payment-plan-corporation-tax/Overdrawn Accounts
If you owe money to your company, it is considered overdrawn. HMRC can levy additional corporation tax if the loan isn’t repaid on time. - Repayment Deadline
Loans must be repaid within nine months after the company’s year-end. Failure to do so triggers a 33.75% S455 tax charge on the outstanding amount. - Interest Charges
If your loan exceeds £10,000 or is interest-free, HMRC may treat it as a benefit in kind, creating additional personal tax liabilities. The company may also have to pay National Insurance contributions on this benefit. - Multiple Tax Liabilities
Director’s loans can result in simultaneous tax charges on:- The company (corporation tax)
- The director (benefit in kind tax)
- Indirectly, the company again if interest isn’t charged
Managing your DLA carefully is essential to avoid these overlapping liabilities.
Source: Fusion Accountants
Anti-Avoidance Rules
HMRC has implemented rules to prevent directors from using loans to dodge taxes. The main anti-avoidance measures are:
- 30-Day Rule: If you repay a loan and take another of similar value within 30 days, HMRC treats it as if you never repaid it.
- Bed and Breakfasting: Temporarily repaying a loan to avoid the nine-month tax deadline and borrowing the same amount again is not allowed.
Even if you wait longer than 30 days, HMRC can still apply penalties if they suspect you are trying to circumvent repayment rules. The safest approach is to borrow only what you can repay and document the loan properly.
Source: Caseron
Recent Changes and Updates
As of 2026, UK rules around director’s loans have tightened, making it more important to manage your Director’s Loan Account (DLA) carefully. Key updates include:
- Higher Tax on Unpaid Loans: If a loan isn’t repaid within nine months of the company’s year-end, the S455 tax rate has increased to 35.75%. This makes unpaid loans more costly for directors.
- Stricter Anti-Avoidance Rules: HMRC continues to monitor attempts to avoid tax by moving loans between companies or repeatedly borrowing and repaying quickly. Tricks like “bed and breakfasting” are being targeted.
- Reporting Requirements: Loans over £10,000 may create a benefit in kind, which must be reported correctly to HMRC to avoid extra personal tax.
- Increased HMRC Scrutiny: HMRC is actively reviewing director’s loans and repayment patterns, so keeping accurate records and following repayment plans is essential.
Takeaway: Stay up to date with rules, repay loans on time, and keep detailed records to avoid tax penalties.
Careful Management and Record Keeping
Effective DLA management is crucial for compliance and avoiding fines. Best practices include:
- Maintain Clear Records
Document all loans, repayments, and interest charges. Use accounting software if possible to track transactions accurately. - Set Realistic Repayment Plans
Ensure loans are repaid within the nine-month window to prevent the S455 tax charge. - Treat Loans as Formal Agreements
Create written terms, even if borrowing from your own company, to avoid misunderstandings during audits. - Consult Professionals
Accountants or tax advisors can help plan loans, set interest rates correctly, and ensure full tax compliance.
Common Mistakes to Avoid
Even experienced directors make errors with director’s loans:
- Ignoring repayment deadlines: Missing the nine-month window triggers a 33.75% corporation tax charge.
- Lack of documentation: HMRC requires proof of all transactions.
- Assuming informality: Treating company funds as personal without records invites scrutiny.
- Trying to circumvent rules: Repeated short-term borrowing schemes like bed and breakfasting are penalized.
The key is honesty, clear record-keeping, and responsible borrowing.
FAQs
Q1: What is the maximum amount I can borrow?
There’s no set limit, but loans over £10,000 may be treated as a benefit in kind, leading to personal tax.
Q2: Can I write off a director’s loan?
Yes, under certain conditions, but it must be properly documented.
Q3: What happens if I repay after the nine-month deadline?
The company pays 33.75% tax, which can be reclaimed once the loan is repaid.
Q4: Is interest mandatory on director’s loans?
Not always, but unpaid interest may be treated as a taxable benefit.
Q5: Can I take multiple loans in a year?
Yes, but the 30-day rule applies.
Key Takeaways
- Director’s loans are useful but come with strict rules.
- Always track all transactions in your DLA.
- Avoid anti-avoidance violations like bed and breakfasting.
- Consult professionals to ensure compliance and avoid unexpected tax liabilities.
- Stay up-to-date with recent legislation changes.
By following these guidelines, directors can access company funds safely while maintaining full tax compliance and avoiding HMRC penalties.
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