Thinking about taking out or making a director’s loan? Here is what you need to know

Business owners have a unique set of financial circumstances. Not only do you have the same opportunities and decisions to make as most other people when organising your personal wealth, but you are also responsible for your company’s finances.

You might think of the relationship between these sources of wealth as entirely one-way, with you generating money in your business that you then extract to live your lifestyle. Yet, this relationship might be more of a dichotomy than you think, as you may be able to use director’s loans to move money between your personal and business accounts.

This can be hugely powerful for achieving your goals, either individually or in your company. In the current higher interest rate climate, it could be particularly powerful for avoiding paying large amounts of interest on money you borrow.

However, it is crucial to understand the rules and manage any director’s loans you make carefully and sensibly. Otherwise, you may find that you have larger tax bills to pay than you expect.

Understanding the rules is particularly essential following the election of a new Labour government in 2024, as potential policy changes may impact the way taking out and paying director loans work in the future.

Read on to find out how you could use a director’s loan to achieve financial objectives in your company or personal life, and what you might want to think about first.

Director’s loans allow you to lend to and borrow from your company

The term “director’s loan” simply refers to money either borrowed from or loaned to your business.

Whether you borrow from or lend to your business, you must keep track of all loans made by or paid to the company in a director’s loan account.

Loaning money to your company

Many business owners choose to loan money to their businesses. This might be to provide start-up funds to a fledgling business, while established companies might benefit from a temporary cash flow boost.

You can choose whether to charge interest on the loan. If you do, this is taxed as income at your marginal rate. Your company must treat this interest as a business expense, and deduct basic-rate Income Tax at source. There’s usually no Corporation Tax to pay on this kind of loan.

Borrowing money from your company

On the other hand, you can borrow money from your company. Many business owners use this function to pay for unexpected costs or to settle particularly large one-off bills.

This is money that is separate to:

• A salary, dividend, or expense repayment
• Money that you previously paid into or loaned the company.

There may be Corporation Tax to pay, which you must aim to settle nine months and one day after your Corporation Tax accounting period ends. Otherwise, interest will be added until the tax or loan is repaid.

There is a specific Corporation Tax rate for loans to participators, standing at 33.75% in 2024/25. You can reclaim any Corporation Tax paid when you repay the director’s loan, but not any interest paid.

There is no legal limit for the size of the loan. However, the tax responsibilities will vary depending on two factors:

• Whether the loan was £10,000 or more.
• Whether you paid interest on the loan below the official rate of interest (ORI). In 2024/25, HMRC has set the ORI at 2.25%.

If the loan is less than £5,000, the business is responsible for the Corporation Tax bill and any interest applied, depending on when you repay it. There are typically no personal responsibilities to carry out unless you become unable to repay the loan.

For loans of £10,000 or more, there are some other aspects to consider. Firstly, your company must pay Class 1 National Insurance on the money it lends to you.

Furthermore, the company must usually treat the loan as a “benefit in kind” – that is, a financial or other benefit that you receive aside from salary.

Meanwhile, it is up to your company and you as the business owner as to whether you charge interest on this loan.

However, if you charge a lower rate than the ORI of 2.25%, the discounted interest you did not pay to the company will be further taxed as a benefit in kind.

You could use a director’s loan to lower the cost of borrowing in the current climate

Director’s loans potentially offer various benefits to you or your business. Interestingly, in the current climate where the ORI is so much lower than the base rate, it could be effective to borrow money from your company rather than elsewhere.

For instance, you might do this if you’re set to have to renew a mortgage in the next few months. This could be attractive as it might be a cheaper alternative to taking out an expensive mortgage deal while interest rates remain higher.

Consider this example. Imagine that you have £400,000 remaining on your mortgage on a £1 million home, and your current fixed-rate deal is about to come to an end.

While the Bank of England is set to reduce its base rate this year, this currently remains at 5.00%. So, according to Moneyfacts, the most competitive two-year fixed rate you would be able to access as of 26 June is 4.44%. Across those two years, you will pay back around £55,000 in interest and capital repayments.

Now imagine that you have £400,000 of surplus cash in your business. As the ORI stands at just 2.25% – considerably lower than the base rate right now – it could be effective to borrow money from your company at this rate in the short term while you wait for the base rate to come down.

This would be a benefit in kind, so you would owe Income Tax on the interest. Assuming you are an additional-rate taxpayer, this would cost you £4,050 in tax – that is 2.25% of £400,000 x 45%.

Accounting for the National Insurance your company would have to pay too, this would take your total costs of borrowing this sum until the end of your accounting period to around £4,500. You would not need to pay this all back until nine months after the end of the Corporation Tax accounting period, either. And, your company could claim back any Corporation Tax paid.

This could be a more cost-effective method of getting £400,000 into your hands than taking out a potentially more expensive mortgage, even factoring in interest and tax costs. Then, you could pay back the loan and take out a mortgage later down the line when rates are ideally lower.

In doing so, you could save a significant sum if you can secure a mortgage with a lower interest rate, and would not be tied into paying a mortgage that does not suit you.

You should also consider potential tax changes under the new Labour government

Looking ahead to the future, the newly elected Labour government could bring changes in tax policies, including the possibility of higher tax rates. In this context, it might be advantageous to delay the repayment of director’s loans to avoid higher tax costs on the repaid amounts. By carefully planning and monitoring future tax policies, you can maximise the tax efficiency of your director’s loans and potentially save on future tax costs.

A Director’s loan can be complex, so be sure to seek advice

Borrowing from and lending to your company using director’s loans can certainly be beneficial. However, these are relatively complex arrangements and it is important to manage them correctly.

For instance, as you have seen from the example above, there are significant tax implications to consider before you explore this method.

Not only do you need to correctly calculate and settle the National Insurance cost and Income Tax bill for taking a benefit in kind, but you could face a hefty Corporation Tax bill if you fail to correctly pay the loan back on time.

Furthermore, it could be time-consuming and complicated to reclaim the Corporation Tax you owe.

As a result, it is crucial to take advice so you can be sure you have carried out all the steps correctly.

Get in touch

Finding the right strategies to manage your personal and business wealth together is crucial to growing a successful, thriving company. At Rosebridge, we have years of experience helping business owners like you to do exactly that.

If you would like bespoke expert financial and investment advice from an award-winning team of Chartered financial planners, get in touch.

Ramsbottom office: Email enquiries@rosebridgeltd.com or call 01204 300010

Chester office: Email enquirieschester@rosebridgeltd.com or call 01244 569141

Leeds office: Email enquiriesleeds@rosebridgeltd.com or call 0113 243 7100

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

Comments included within this article are not constituted as advice. If you require personalised advice, please contact your financial adviser.

The Financial Conduct Authority does not regulate tax planning.

Your home may be repossessed if you do not keep up repayments on your mortgage.