What happens if I borrow money from my limited company?
You can borrow money from your limited company, but it should not be treated like personal spending from your own bank account. If you take money that is not salary, dividend, expense repayment or repayment of money you previously put into the company, it may create a director’s loan. If the loan is not managed properly, the company may face Section 455 tax, benefit in kind reporting, interest, payroll issues and extra admin.
GOV.UK’s director’s loan overview explains that a director’s loan is money taken from the company that is not salary, dividend, expense repayment, or money you previously paid into or loaned to the company.
Merranti’s director’s loan guide is a useful starting point because many directors accidentally create loan accounts without realising it.
Merranti’s guide on how directors accidentally create tax bills is also relevant because casual withdrawals, personal spending and unclear dividends can quickly create tax problems.
What is a director’s loan account?
A director’s loan account records money moving between a director and the company.
If the director lends money to the company, the loan account is usually in credit. This means the company owes money to the director.
If the director takes money from the company, and that money is not salary, dividend, expense repayment or repayment of an earlier loan, the loan account may become overdrawn. This means the director owes money to the company.
GOV.UK’s director’s loan overview explains that you must keep records of money borrowed from or paid into the company, usually through a director’s loan account.
This matters because a limited company is separate from its director.
Even if you own 100% of the company, the company’s money is not automatically your personal money.
Merranti’s guide on mixing personal and business money is useful because many director loan problems start with company cards being used for personal spending.
When does a director’s loan happen?
A director’s loan can happen in several ways.
It might be obvious, such as transferring £5,000 from the company bank account to your personal bank account.
It might also happen gradually.
For example, a director’s loan account may be created where:
the company pays personal bills
the company card is used for personal spending
the director takes cash without payroll or dividend paperwork
the director withdraws more than available dividends
the company pays personal travel or holidays
personal tax bills are paid by the company
money is taken before profits are checked
expenses are posted incorrectly
dividend paperwork is missing
The problem is not always the original payment.
The problem is often that the payment is not classified correctly.
If it is not salary, dividend, reimbursement or repayment of money owed to the director, it may be a loan.
What if the company owes the director money?
Not every director’s loan account is a problem.
If the director has paid company costs personally, or put money into the company, the company may owe money back to the director.
This can happen where a director pays for:
startup costs
company formation costs
software
equipment
travel costs
professional fees
office supplies
company bills from a personal account
If the company repays the director for genuine company costs, that repayment may not be taxable income. It is usually repayment of money the director already spent for the company.
However, the records need to be clear.
The company should keep receipts, invoices and explanations showing that the costs belonged to the company.
Merranti’s business expense guide is useful because a cost being paid by a director personally does not automatically mean it is a valid company expense.
What if the director owes the company money?
The bigger tax risk usually arises when the director owes money to the company.
This is called an overdrawn director’s loan account.
GOV.UK’s guidance on owing money to your company explains the company and personal tax responsibilities where a director owes money to the company.
If the loan is still outstanding at the end of the company’s accounting period, it needs to be reported correctly.
If it is not repaid within 9 months of the end of the Corporation Tax accounting period, the company may need to pay Corporation Tax at 33.75% of the outstanding loan amount.
This is often called a Section 455 tax charge.
Merranti’s Section 455 tax guide explains why this charge can surprise directors who assume they can simply “put the money back later”.
How Section 455 tax works
Section 455 tax is not the same as normal Corporation Tax on profits.
It is a tax charge linked to loans made by close companies to participators, which often includes owner-directors of small limited companies.
For many small companies, the practical issue is simple:
the director owes money to the company
the loan is still outstanding after the accounting period
the loan is not repaid within 9 months of the period end
the company may need to pay a 33.75% tax charge
GOV.UK’s director’s loan guidance explains that, if a loan is not repaid within 9 months of the end of the Corporation Tax accounting period, the company pays Corporation Tax at 33.75% of the outstanding amount.
For example, if a director owes the company £20,000 and the loan is not repaid within the deadline, the company may face a Section 455 tax charge of £6,750.
That does not necessarily mean the loan has disappeared.
The director may still owe the company the money.
Can Section 455 tax be reclaimed?
Section 455 tax can usually be reclaimed after the loan is repaid, written off or released.
However, this does not make the charge harmless.
GOV.UK’s director’s loan guidance explains that the company can reclaim the Corporation Tax paid on a director’s loan that has been repaid, written off or released, but cannot reclaim interest paid on the Corporation Tax.
The timing also matters.
The company cannot usually reclaim the tax immediately after repayment. GOV.UK explains that the claim is made after the relief is due, which is 9 months and 1 day after the end of the Corporation Tax accounting period in which the loan was repaid, written off or released.
That can create a cash-flow problem.
The company may pay Section 455 tax now and wait a long time before it can recover it.
Merranti’s Corporation Tax guide is useful because directors should understand the difference between normal Corporation Tax on profits and tax charges linked to director loans.
Loans over £10,000 can create benefit in kind issues
A director’s loan can also create a personal tax issue.
If the director owes the company more than £10,000 at any time in the year, and interest is not paid at the official rate, there may be a benefit in kind.
GOV.UK’s director’s loan guidance explains that if a shareholder and director owes the company more than £10,000 at any time in the year, the company must treat the loan as a benefit in kind.
This can mean:
P11D reporting
personal tax for the director
National Insurance costs for the company
extra payroll or benefits admin
interest calculations
Self Assessment reporting
This is separate from Section 455.
A director can have both a Section 455 issue and a benefit in kind issue.
This is one reason overdrawn loan accounts should be reviewed before they become large.
Repaying the loan is not always enough
Some directors repay a loan shortly before the 9-month deadline and then borrow the money again soon afterwards.
This is sometimes called bed and breakfasting.
GOV.UK’s director’s loan guidance includes rules that can still trigger a tax charge where loans are repaid and replaced by new loans around the repayment date.
The detail depends on the amounts and timing.
The practical point is that a short-term repayment followed by another withdrawal may not solve the problem.
If the company is effectively still lending money to the director, the tax position needs to be checked.
Merranti’s Section 455 tax guide is relevant because directors often think a quick repayment clears the issue, when the anti-avoidance rules may still need to be considered.
Writing off a director’s loan can create tax
A company may decide not to ask the director to repay the loan.
This is called writing off or releasing the loan.
That is not tax-free.
GOV.UK’s director’s loan guidance explains that, if a loan is written off or released, the company may need to deduct Class 1 National Insurance through payroll, and the director may need to pay Income Tax through Self Assessment.
Writing off a loan may also have company law and insolvency issues if the company is in financial difficulty.
It should not be used casually.
If the company cannot afford its bills, or owes HMRC, writing off money owed by a director can create serious problems.
The better approach is to review the loan account before it reaches that point.
Director loans and dividends
Director loan problems often start with dividends.
A director may take regular money from the company and assume those payments are dividends.
But dividends can only be paid from available distributable profits.
If the company does not have enough profits, or if dividend paperwork is missing, the withdrawals may not be valid dividends.
They may instead become a director’s loan.
This matters where:
the company has made a loss
Corporation Tax has not been allowed for
profits are lower than expected
bookkeeping is not up to date
dividends are taken monthly without review
the company has old losses
personal withdrawals exceed available profit
Merranti’s salary and dividends guide is useful because the most efficient way to take money from a company depends on salary, dividends, Corporation Tax, National Insurance and available profits.
Director loans and personal spending
Personal spending through the company is another common cause.
A director might use the company card for:
groceries
holidays
personal fuel
family meals
personal subscriptions
clothing
home costs
school fees
personal tax bills
non-business travel
If these costs are not genuine company expenses, they should not usually be posted as normal business costs.
They may need to be treated as personal spending by the director, creating or increasing an overdrawn loan account.
Merranti’s business expense guide and guide on mixing personal and business money are useful here because the same bank transaction can have very different tax treatment depending on its purpose.
Director loans and insolvency risk
Director’s loan accounts become especially sensitive if the company has cash-flow problems.
If a company owes money to HMRC, suppliers, lenders or employees, and the director also owes money to the company, that loan is an asset of the company.
In an insolvency situation, a liquidator may review the director’s loan account and may seek repayment.
This can be a serious issue where directors have taken money informally while the company was struggling.
A director should not assume that a loan can simply be ignored if the company later closes.
If the company is under financial pressure, director withdrawals should be reviewed carefully before more money is taken.
How to avoid director loan account problems
The best approach is to keep the company’s money and the director’s money clearly separate.
Good practice includes:
using a company bank account only for company transactions
avoiding personal spending on the company card
recording director reimbursements properly
checking profit before declaring dividends
preparing dividend vouchers
running salary through payroll
reviewing the loan account during the year
clearing overdrawn balances before deadlines
keeping receipts and explanations
asking before taking large withdrawals
The director’s loan account should not be something discovered only when the year-end accounts are prepared.
By then, the tax problem may already have happened.
Merranti’s HMRC records guide is useful because loan account accuracy depends on clear bookkeeping and supporting records.
Common director’s loan mistakes
The first mistake is treating company money as personal money.
A limited company is separate from its director, even if the director owns all the shares.
The second mistake is taking dividends without checking profit.
If there are not enough distributable profits, the withdrawal may become a loan.
The third mistake is ignoring the 9-month deadline.
If the loan is not repaid within 9 months of the Corporation Tax accounting period end, Section 455 tax may apply.
The fourth mistake is forgetting the £10,000 benefit in kind rule.
A loan over £10,000 can create personal tax and company reporting issues.
The fifth mistake is repaying and immediately re-borrowing.
Anti-avoidance rules can catch arrangements that do not genuinely clear the loan.
The sixth mistake is waiting until the accounts are due.
Director’s loan accounts should be reviewed before the year end and before the 9-month repayment deadline.
Speak to Merranti before your director’s loan becomes a tax problem
A director’s loan is not automatically wrong, but it needs to be managed properly.
A proper review should check the loan balance, repayment deadline, Section 455 exposure, benefit in kind position, dividend history, salary strategy, personal spending, expense claims, company profit and cash flow.
Merranti’s director’s loan guide, Section 455 tax guide, salary and dividends guide, guide on how directors accidentally create tax bills and guide on mixing personal and business money are useful starting points.
If you have borrowed money from your limited company, or your director’s loan account is overdrawn, contact Merranti Accounting before the repayment deadline so the tax position can be reviewed properly.
What is a director’s loan?
A director’s loan is money taken from the company that is not salary, dividend, expense repayment, or repayment of money previously paid into the company. GOV.UK’s director’s loan overview explains the definition.
What is an overdrawn director’s loan account?
An overdrawn director’s loan account means the director owes money to the company. This can happen where the director takes money or personal benefits from the company without treating them as salary, dividends or expenses.
What is Section 455 tax?
Section 455 tax is a Corporation Tax charge that can apply where a director’s loan is not repaid within 9 months of the end of the company’s Corporation Tax accounting period. GOV.UK explains the 33.75% charge here.
Can Section 455 tax be reclaimed?
Yes, the company can usually reclaim Section 455 tax after the loan is repaid, written off or released. However, GOV.UK says interest paid on the Corporation Tax cannot be reclaimed.
What happens if a director’s loan is over £10,000?
A loan over £10,000 can create a benefit in kind issue if interest is not paid at the official rate. This can create personal tax and company reporting responsibilities.
Can I write off a director’s loan?
A company can write off a director’s loan in some cases, but it can create Income Tax and National Insurance issues. It should be reviewed carefully before doing it.
