Can I borrow money from my limited company in the UK?
It’s fairly common for directors to borrow money from their limited company through a director’s loan. If you choose this option, it’s essential to maintain accurate and up-to-date records of all transactions in a director’s loan account.
In this guide, we’ll cover everything you need to know about directors’ loans, including their purpose, how to record money borrowed from or lent to your company, and the potential tax implications involved.
What is a director’s loan?
A director’s loan refers to any money personally received from your company that isn’t one of the following:
- Salary payments
- Dividends from shares
- Reimbursement for business-related expenses
- Repayment of money previously paid into the business
- Pension contributions
In essence, it’s money borrowed from the company that you’ll need to repay at a later date. Such loans can arise for several reasons, including:
- Withdrawing or transferring cash from the company’s bank account for personal use
- Using company funds to pay for personal expenses
- Making non-business purchases with the company bank card
- Accidentally paying yourself an unlawful dividend
- Making charitable donations in your name with company funds
Additionally, lending money to your company is also considered a director’s loan. This might happen when you use personal funds to purchase equipment, cover temporary cash flow gaps, or support expansion efforts.
If you’re new to running a limited company, it’s easy to assume that all company funds and assets are yours, as the hard work you put in generates its profits. However, that’s not the case.
When you establish a limited company, it becomes a separate legal entity—a distinct “person” in the eyes of the law. This entity:
- Owns its assets and profits
- Can enter into contracts and borrow money in its name
- Assumes responsibility for its debts and liabilities
Because of this separation, you can’t treat your company’s income as personal funds. You’re only allowed to withdraw money in one of the approved ways mentioned earlier or as a director’s loan.
While this concept of a “corporate veil” may seem restrictive, it protects company owners by limiting their personal liability for business debts. It also offers opportunities for enhanced tax efficiency when managed appropriately.
Keep a record of loans in a director’s loan account
It’s essential to maintain a detailed record of any funds you borrow from or lend to your company, including all repayments. This record is called a director’s loan account (DLA).
A DLA is considered overdrawn when you owe money to the company. Conversely, it is in credit when the company owes money to you.
You can manage a DLA using accounting software or a simple spreadsheet, depending on your preference. If your company has multiple directors, each must have a separate DLA.
Regardless of the bookkeeping method, every director’s loan account must be included in the balance sheet as part of your company’s annual accounts.
- An overdrawn DLA at the end of your financial year will appear as an asset on the balance sheet.
- A DLA in credit will be recorded as a liability.
Tax on directors’ loans – when you borrow money from your company
Any money borrowed from your limited company must be repaid. Depending on the loan amount and how quickly it’s settled, there may be tax implications for you or the company.
To minimize potential tax liabilities, aim to repay a director’s loan within 9 months of the end of your company’s Corporation Tax accounting period.
This accounting period typically aligns with your accounting reference date (ARD), which is the company’s financial year-end and the date used to prepare annual accounts.
If you repay the loan within 9 months of the end of the accounting period
When completing your Company Tax Return at the end of your Corporation Tax accounting period, you must declare any outstanding director’s loan balance using supplementary form CT600A.
If the loan balance exceeds certain thresholds, S455 tax may apply under Section 455 of the Corporation Tax Act 2010. This tax is charged at 33.75% on the overdrawn loan amount.
- If you owe less than £10,000 and you repay the full balance within 9 months of the end of your Corporation Tax accounting period – no tax is payable by you or the company.
- If you owe more than £10,000 at any time in the tax year – it is treated as a ‘benefit in kind’ and the company must pay Class 1A National Insurance on the loan amount. You may also have to pay personal tax through Self Assessment on the loan at the official rate of interest (currently 2.25%). However, no S455 tax is payable if you repay the full balance within 9 months of the Corporation Tax accounting period.
S455 tax is a Corporation Tax applied to directors’ loans and is included as part of a company’s overall Corporation Tax bill. For the 2024-25 tax year, the rate is 33.75%, aligning with the higher rate of dividend tax. This tax must be paid within 9 months of the end of the company’s accounting period.
As a result, while your Company Tax Return may indicate that S455 tax is owed on the outstanding loan balance at the end of the accounting period, you won’t need to pay the tax if the loan is fully repaid within 9 months of that date—before the Corporation Tax payment deadline.
If you do not repay the loan within 9 months of the end of the accounting period
When completing your Company Tax Return at the end of your accounting period for Corporation Tax, you must declare any outstanding director’s loan balance using supplementary form CT600A.
If the loan is not repaid within 9 months of the accounting period’s end:
- No personal tax is due on the outstanding loan amount.
- The company must pay S455 tax at 33.75% on the outstanding loan balance. This tax can be reclaimed once the loan is fully repaid.
- The company must also pay interest at the official rate on the S455 tax liability until the tax is settled or the loan is repaid. However, the interest paid is not reclaimable.
‘Bed and breakfasting’ anti-avoidance rules
In 2013, HMRC implemented anti-avoidance measures, known as the ‘bed and breakfasting’ rules, to prevent directors from repaying a loan just before the 9-month S455 tax trigger date and immediately re-borrowing the same amount.
This tactic allowed directors to avoid S455 tax on loans that effectively remained unpaid and untaxed indefinitely.
To address this, HMRC introduced the ‘30-day rule’:
- If a director borrows £5,000 or more within 30 days before or after repaying an earlier loan of £5,000 or more, the company becomes liable for S455 tax on the original loan amount.
Additionally, the ‘arrangements rule’ applies to outstanding loans of £15,000 or more where the 30-day rule doesn’t apply:
- If a director arranges a new loan of at least £5,000 at the time of any repayment, HMRC treats the new loan as a replacement for the repayment, and S455 tax applies to the original loan.
When either of these rules is triggered:
- Repayments are applied to the newer loan first, leaving the original loan balance intact.
- S455 tax and interest continue to apply to the full amount of the original loan until both loans are repaid.
The company can reclaim S455 tax after the director fully repays the original loan, but any interest paid on the tax liability is non-reclaimable.
Writing off a director’s loan
A company can choose to write off a director’s loan by treating the outstanding amount as either a bonus or a dividend. Opting to classify it as a dividend is generally more tax-efficient but is only possible if the director is also a shareholder.
The director must include this income on their Self Assessment tax return, and it will be subject to Income Tax and National Insurance contributions if classified as a bonus or dividend tax if treated as a dividend.
The company will not qualify for Corporation Tax relief on the written-off loan. Furthermore, the loan’s value will be subject to Class 1A National Insurance contributions.
Tax on directors’ loans – when you lend money to your company
If you, as a director, lend money to your limited company, your director’s loan account will be in credit. In this case, you can withdraw money from the company up to the amount you’ve paid in without facing tax consequences.
Your company will not incur any Corporation Tax on the money you lend. Additionally, you can charge interest on the loan, which can reduce the company’s Corporation Tax bill. You have the flexibility to determine the interest rate, which will be treated as:
- A business expense for the company
- Personal income for you
You will need to report this income on your Self Assessment tax return. The company must:
- Pay you the interest minus the basic rate of Income Tax (20%)
- Report and pay the Income Tax to HMRC quarterly using form CT61
It is quite common for companies, especially during their early stages or when facing temporary cash flow challenges, to borrow money from directors.
Does a director’s loan require shareholder approval?
Some directors’ loans require shareholder (member) approval through an ordinary resolution. However, according to the Companies Act 2006, no shareholder resolution is needed in the following cases:
- The total value of all loans to a director is less than £10,000
- The total value of all credit transactions to a director is less than £15,000
- The loan is less than £50,000 and is intended for company-related business
- The loan is for the purpose of defending civil or criminal proceedings related to the director’s role in the company
When shareholder approval isn’t required, the director(s) can approve the loan at a board meeting, documenting the decision in the meeting minutes.
If you’re the sole shareholder and director of your company, approving a loan at a board meeting and passing a resolution are simple administrative tasks. However, it’s still essential to keep accurate records of all decisions and comply with the rules regarding directors’ loans, including maintaining a director’s loan account.
Should I borrow money from my limited company?
One of the advantages of setting up a limited company is the option to borrow money from it in the form of a director’s loan. This loan type provides flexibility, convenience, and often better tax efficiency compared to borrowing from commercial lenders.
Under certain conditions, you can borrow up to £10,000 from your company without triggering tax liabilities. It also offers a short-term alternative to bank loans, saving you from paying high interest rates.
However, directors’ loans are complex and come with potential tax implications and significant administrative requirements. What might seem like a straightforward solution can become costly and time-consuming if you fail to adhere to HMRC’s rules and guidelines.
To ensure you’re making the best choice for you and your company, it’s highly recommended to seek professional advice from an accountant before taking a director’s loan.
Do you have any other questions?
In this article, we explored the concept of director’s loans for UK limited company owners. We outlined the definition of a director’s loan, including how it works and when it’s used, and discussed the importance of keeping accurate records through a director’s loan account (DLA). We also covered the tax implications for borrowing and lending money, including the S455 tax for overdrawn DLAs and potential penalties for non-compliance. Furthermore, we explained the conditions under which shareholder approval is necessary for a director’s loan.
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