Director's loans
Tax implications when directors borrow from or loan money to their limited company.
Corporation Tax
Close company tax rules for owner-managed businesses
What close company status means for your tax obligations, including Section 455 tax on director's loans.
UK-wide
Guide summary
If your company is controlled by 5 or fewer shareholders (a 'close company'), you must follow special tax rules. Report any loans over £10,000 to directors or shareholders. You may need to pay tax on these loans at 33.75% if not repaid in time.
- Pay 33.75% tax on director loans over £10,000 not repaid within 9 months
- You can reclaim the tax 9 months after repaying the loan
- Loans repaid and reborrowed within 30 days still count as unpaid
- Charge interest on loans over £10,000 or report as a benefit
- Most owner-managed limited companies are close companies
- Use dividends or salary to clear loans before year-end
- Report benefits in kind on form P11D if loans exceed £10,000
- HMRC official interest rate is 2.25% from April 2025
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UK-wide
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What is a close company
A close company is one controlled by 5 or fewer participators (broadly, shareholders or people with rights over the company), or by any number of participators who are also directors. The vast majority of owner-managed limited companies in the UK are close companies.
Being a close company is not a problem in itself, but it triggers specific tax rules designed to prevent shareholders from extracting profits in tax-advantageous ways.
Director's loan accounts
The most common close company tax issue is the director's loan account. When a director or shareholder withdraws money from the company that is not salary, dividends, expense reimbursement, or repayment of money previously lent to the company, it creates a director's loan.
If the loan account has a debit balance (the director owes the company) at the end of the accounting period, the company faces a Section 455 tax charge.
How to manage director's loans
There are several ways to clear a director's loan before the year end:
- Declare dividends: Vote a dividend sufficient to clear the loan balance (subject to distributable profits)
- Process as salary: Run the amount through payroll (subject to income tax and NIC)
- Repay the loan: Transfer personal funds back to the company
- Offset against expenses: Claim legitimate business expenses owed to you by the company
Warning: The bed and breakfasting rule means you cannot repay a loan and then re-borrow within 30 days to avoid the Section 455 charge. HMRC treats such arrangements as if the loan was never repaid.
Benefits in kind for director's loans
If a director or employee has an outstanding loan from the company exceeding £10,000 at any point during the tax year, and the company does not charge interest (or charges below HMRC's official rate), there is a benefit in kind. This must be reported on form P11D and the director pays income tax on the benefit.
The company may also owe Class 1A National Insurance on the benefit.
Distributions by close companies
Close company rules also affect how certain payments are classified. Some arrangements that would otherwise be treated as loans or other transactions may be reclassified as distributions (dividends) by HMRC, which changes their tax treatment.
Seek professional advice if you are structuring complex arrangements involving loans, share buybacks, or other transactions between you and your close company.