What is a director’s loan?

If you’re the director of a limited company, you’ve probably heard of this type of loan – but you might not know exactly what a director’s loan could mean for you and your business.

Director’s loans can help you cover short-term personal expenses, but they can also lead to cash flow issues and heavy tax penalties for your company if used routinely.

In this easy-to-follow guide, Finance Rate will explain exactly what a director’s loan is, your tax obligations, and guidelines to follow to avoid causing problems for your company.

What is a director’s loan?

If you’re the director of a limited company, you can borrow money from the company using a director’s loan.

The government website defines a director’s loan as money taken from your company that is not:

  • a salary, dividend or expense repayment
  • money you’ve previously paid into or loaned the company

You will eventually have to repay the borrowed money back into the company, so director’s loans are typically used only to cover short-term or one-off expenses.

Another type of director’s loan involves the director lending money to the company, to help with start-up costs or alleviate cash flow issues, for example. In this case, the director is owed money from the company and can withdraw the money without implications at any time.

In what circumstances can I borrow money from my company?

Director’s loans can be taken out when you need immediate access to additional funds to cover unexpected personal expenses.

There is no legislation that dictates what you can and cannot use a director’s loan for – however, it’s important to remember that the money still belongs to the company and will have to be paid back in full within nine months and one day of the company’s year-end to avoid heavy tax penalties.

Only take out a director’s loan as a last resort if you need immediate access to additional personal funds, and consider whether other short-term loan options might be more appropriate first.

How much can I borrow?

There is no legal limit to how much money you can borrow from your company.

However, make sure you carefully consider how much the company can actually afford to lend you, and how long it can manage without this money. Failure to do this could cause cash flow problems for your company.

You should also bear in mind that any loan of £10,000 or more will automatically be treated as a ‘benefit in kind’ and must be reported on your self-assessment tax return.

What’s more, you may have to pay tax on the loan at the official rate of interest. For director’s loans of £10,000 or more, you should therefore seek the approval of the shareholders before withdrawing money from the company.

What is a director’s loan account?

You must keep track of all the money you either borrow from or lend to your company in your director’s loan account (DLA).

If the company owes you money, then the account will be in credit. However, if you owe money to the company, then the DLA will be overdrawn.

Be aware that shareholders may become concerned if your DLA is overdrawn for long periods of time. You should aim to ensure that it is in credit or at zero most of the time.

Do I have to pay tax on a director’s loan?

You may need to pay tax if your DLA is overdrawn at the date of your company’s year-end. If the entire director’s loan is paid back within nine months and one day of the company’s year-end, you won’t have to pay any tax.

Any overdue payment of a director’s loan will be subject to an additional Corporation Tax charge. The rate for the 2023/24 tax year is 33.75%, which is the higher rate of dividend tax.

You can claim this tax back once the loan is fully repaid – however, this can be a long and difficult process.

What happens if I owe my company money?

If you owe £10,000 or more, the total loan amount is classed as a benefit in kind. You will need to record it at the end of the tax year on Form P11D as it will be liable to both personal and company tax.

As a general rule, you should make sure that shareholder approval is given before withdrawing more than £10,000 from the company. Although this is not a legal requirement, it’s a good idea to ensure that everyone is comfortable with your decision to take out a director’s loan.

What happens if my company owes me money?

Your company will not pay any Corporation Tax on money you personally lend to it, and you can withdraw the full amount from the company at any time.

If you charge any interest on the borrowed amount, this will be classed as a business expense for the company and personal income for you. You must declare the interest amount as income on your self-assessment and will be taxed accordingly.

Director’s loans: Key takeaways

If you’re considering borrowing money from or lending money to your company, here are the key things you need to remember:

  • Only take out a director’s loan when absolutely necessary – be sure to explore other short-term loan options first
  • Repay your director’s loan within nine months and one day of the company year-end to avoid heavy tax penalties
  • Aim to borrow less than £10,000 – director’s loans are generally unsuitable for large expenses
  • If you do borrow £10,000 or more, you must report it on your self-assessment tax return and the company must treat it as a benefit in kind
  • Do not allow your DLA to be overdrawn for extended periods

Director’s loans are tricky to navigate, so should only ever be used as a last resort. If you’re in need of a short-term loan, remember that there are other options available that could be more suitable for you.

That’s where Finance Rate comes in – we provide no-nonsense information on all things finance to help you make well-informed financial decisions.

Check out our complete loans guide to learn more about the options that are out there.