Table of Contents
- Introduction
- What Is a Director’s Loan?
- Tax Implications of Director’s Loans
- Anti-Avoidance Rules
- Recent Changes and Updates
- Careful Management and Record Keeping
- Avoid Doing This
- FAQs
Key Takeaways
- Repayment within nine months after the company’s year-end.
- 30 days rule and Bed and Breakfasting are anti-avoidance rules.
- Recent legislative changes have tightened regulations to prevent tax avoidance.
- Always keep track of the money that goes in and out of your Directors Loan Account (DLA)
Introduction
You stumbled upon this blog because you’re a company director based in the UK, and you’ve probably heard of the term “director’s loan.” It might seem like an easy way to borrow money from your company, especially during times when cash flow is tight. But if you’re not careful, that loan can quickly turn into a big tax problem. HMRC (His Majesty’s Revenue Customs) or the tax, payments and customs authority takes director’s loans seriously, and they have rules in place to stop people from using these loans to dodge taxes because unfortunately, there are a lot of loopholes that people take advantage of and HRMC is quick to catch up.
Director’s loans can be very helpful for small business limited company owner, director, or owner/shareholder to access company funds. However, without proper understanding and management, instead of being a great help, it could also be one of your biggest headaches. This guide breaks down what director’s loans are, the associated tax rules, and how to handle them responsibly.
We’ll walk you through what a director’s loan is, how it affects your taxes, and the smart way to use one without getting into trouble. Whether you’re new to running a business or just need a refresher, this simple guide is for you.
The image below will give you an idea of what the tax implications are if for example the director owes the money or the company owes the director money:
Source: Fusion Accountants
What Is a Director’s Loan?
A director’s loan happens when a director borrows money from the company, but it’s not part of their salary, dividends, or reimbursed expenses. Think of it like taking an IOU from your own business. It might be a small personal expense, a holiday advance, or funds needed for an emergency. As long as the company is making a note of it, it becomes a director’s loan.
This kind of borrowing isn’t illegal. But there are clear rules around how much you can borrow, how long you have to pay it back, and what happens if you don’t.
This image below is an example of keeping track of transactions or rather an outline as to how you should keep track of it should you do it your way:
Source: Caseron
Tax Implications of Director’s Loans
- Overdrawn Accounts: If you owe the company money, it’s considered overdrawn, leading to potential tax charges.
- Repayment Deadline: Loans must be repaid within nine months after the company’s year-end to avoid a 33.75% Corporation Tax charge.
- Interest Charges: HMRC may require interest to be charged on the loan, which has its own tax implications.
Here’s where things get serious. If you borrow from the company and don’t pay it back on time, HMRC can charge the company extra tax. If the loan isn’t paid back within nine months of the end of the accounting year, the company must pay a tax charge called S455 tax at a rate of 33.75% of the loan amount. That’s a big chunk of money to lose, especially for small businesses.
On top of that, if the loan is more than £10,000, it’s seen as a benefit in kind. This means the director may have to pay extra personal tax, and the company might have to pay National Insurance on it. HMRC also expects the company to charge interest on the loan if it goes unpaid for a while, and that interest becomes taxable income for the business.
So in short, if you don’t plan your loan well, you could be hit with taxes from all sides: personal, corporate, and indirect.
This here is another example of keeping records of your transactions in your Director’s Loan Account using an application of software:
Source: Heelan Associates
Anti-Avoidance Rules
- 30-Day Rule: Repaying a loan and taking out another within 30 days can trigger tax charges, as it’s seen as an attempt to avoid tax.
- Bed and Breakfasting: This is when a director has a loan but pays it before the fiscal year ends to avoid paying taxes but he/she gets another loan but doesn’t pay it.
Some directors have tried to get around the nine-month repayment rule by paying off the loan temporarily, then borrowing the same amount again shortly after. This is known as “bed and breakfasting.” HMRC caught on to this trick and created the 30-day rule. If you repay a loan and take out another of the same or similar size within 30 days, HMRC treats it like you never really repaid the loan. So you still get taxed.
These rules are part of HMRC’s anti-avoidance strategy to stop people from looping funds through their company accounts without paying their fair share. Even if you wait more than 30 days, if HMRC believes you’re trying to game the system by recycling loans, they can still apply penalties.
The safest route is to only borrow what you can pay back and to treat the loan like a real financial agreement—with terms, records, and a plan.
Recent Changes and Updates
- Updated Rules (Effective 30 October 2024): The government has tightened rules to prevent companies from recycling loans through multiple entities to avoid tax.
- Increased Scrutiny: HMRC is actively monitoring and enforcing these rules to curb tax avoidance.
As of late 2024, the UK government has tightened director’s loan rules even more. The aim is to stop businesses from using complicated structures—like transferring money between multiple companies—to sidestep tax. HMRC now has more power to investigate loans that seem suspicious or repeated.
There’s also increased scrutiny on whether companies are charging appropriate interest on director’s loans. If they’re not, HMRC may treat the missing interest as extra income and tax it accordingly.
This makes it more important than ever to stay current with the rules and check your approach regularly. Just because something worked two years ago doesn’t mean it’s okay now.
Careful Management and Record Keeping
- Maintain Clear Records: Document all loans, repayments, and interest charges meticulously.
- Set Realistic Repayment Plans: Ensure you can repay loans within the stipulated timeframe to avoid penalties.
- Consult Professionals: Seek advice from accountants or tax professionals to navigate complex situations.
Managing a director’s loan the right way starts with transparency. Keep a clear record of every loan, including the amount, the date it was taken, and when you plan to repay it. Set a realistic repayment timeline and follow it.
It also helps to treat the loan like a formal agreement. Some companies create written terms for director’s loans, just like a bank would. That way, everyone knows the expectations, and there’s less confusion.
Most importantly, talk to a qualified accountant or financial advisor before taking out a loan. They can help you figure out the tax impact, set up the loan properly, and avoid surprises from HMRC down the line.
Common Mistakes to Avoid
- Ignoring Repayment Deadlines: Missing the nine-month repayment window can result in corporation tax charge of 33.75% of the total loan amount.
- Lack of Documentation: It does not matter if you were in good faith, if you lack the documentations as proof then you will have a hard time during audits.
- Assuming Informality: Treating company funds as personal without formal agreements can attract HMRC’s attention.
A lot of directors make the mistake of treating company money like their own, in a sense it is but it is not fully yours to claim. Just because you’re the boss doesn’t mean you can take money whenever you want. HMRC sees the company as a separate legal entity, and they expect directors to follow the rules.
Another common mistake is forgetting to document loans or assuming that “I’ll pay it back later” is enough. If HMRC audits your company and there’s no paper trail, you could be fined—even if you had good intentions.
Lastly, don’t try to get clever with the rules. Tricks like repaying and re-borrowing loans within a short period might seem smart, but HMRC is already a few steps ahead. Stick to honest, simple practices and you’ll stay out of trouble.
FAQs
Q1: What is the maximum amount I can borrow as a director without tax implications?
A: There’s no set maximum, but loans over £10,000 may be considered a benefit in kind, leading to personal tax implications.
Q2: Can I write off a director’s loan?
A: Yes.
Q3: What happens if I repay the loan after the nine-month deadline?
A: The company will have to pay the 33.75% tax charge, which can be reclaimed once the loan is repaid.
Q4: Is it mandatory to charge interest on director’s loans?
A: Not always, but if no interest is charged, it might be considered a benefit in kind, leading to personal tax liabilities.
Q5: Can I take multiple director’s loans in a year?
A: Yes, after the 30 day rule.
