Are you a director of a limited company looking to borrow money from the company, or lend money to it? Either way, these transactions have legal requirements including clear and separate record keeping.

A director’s loan can work two ways:

  • Money you take out of your business that isn’t salary, dividends, a repayment of expenses, or a repayment of money you have already lent or paid into the business.

  • It also works the other way around – you can loan your own money to the company, for example to help with cashflow.

With the right planning, a director’s loan can be a useful tool to support your business or personal finances.

Borrowing and lending with a director’s loan

The rules around director’s loans can be complex, and this guide doesn’t attempt to cover them comprehensively. However, here are some of the main points to bear in mind, and we suggest visiting the gov.uk page on director’s loans for further information.

Borrowing from the business

You can borrow money to cover short-term personal costs, but it needs to be repaid within nine months of the end of your company’s Corporation Tax accounting period to avoid additional tax charges.

Borrow too much or leave it unpaid for too long, and it could also affect your personal credit or the company’s ability to access finance.

Lending to the business

Lending your own money to the business can help it grow or stay afloat when cashflow is tight. You’re free to withdraw this money later, and you might even charge interest – though that counts as income for you and an expense for the company.

Keeping records

You’ll need to keep a ‘director’s loan account’ - a running total of what you personally owe the company, or what it owes you. At any given time, you might be in credit (the company owes you) or overdrawn (you owe the company).

If you owe the company money at your financial year-end, it’ll show as an asset in the company’s accounts. If the company owes you, it becomes a liability.

Are you eligible for a director loan?

To get money from your company in the form of a director’s loan, you need to be a director of a limited company, or a very close family member of the director. Being the director means you’re officially responsible for running the company and making sure the accounts and reports are properly prepared.

Directors must be at least 16 years old and not disqualified from being a director. The company must have a registered office in the UK – but you don’t personally have to live here.

How much can I borrow with a director loan?

Good news, there’s no legal limit on how much you can borrow from your company through a director’s loan. But you need to consider your company’s financial health carefully before taking out large sums. Taking money out should never leave the business short of funds to cover its day-to-day running costs.

Also, if you’re not a shareholder and want to borrow £10,000 or more at once, the company will need approval from its shareholders first. This is to protect the business and avoid any accusations of misfeasance or worse… theft.

If you are a shareholder-director and owe over £10,000 at any point in the year, HMRC will treat this as a benefit in kind. This brings potential tax and National Insurance liabilities that can make things more complicated (and more expensive) for you personally. So think carefully before you cross this threshold and consider seeking guidance from your accountant or financial adviser.

Keeping track: the director’s loan account

The director’s loan account is basically your personal ledger with the company. It typically tracks:

  • Money you’ve borrowed from the company.

  • Money you’ve lent to the company.

  • Any repayments you’ve made.

  • Instances where you’ve used the company card for personal expenses.

  • Business costs you’ve paid personally and want to reclaim.

It’s crucial to keep this account up to date and accurate, not just for your own sanity but also for tax and accounting purposes. If your accounts aren’t clear, HMRC may challenge the figures or impose fines and penalties.

Can you charge interest when lending money to your business?

Yes, directors can charge interest on money they lend to their company. The interest paid is a deductible expense for the company. However, the interest received personally is taxable income and must be declared on a Self Assessment tax return.

If the interest rate is below HMRC’s official rate (currently 2.25%), it may trigger benefit-in-kind charges, and tax may need to be paid on the difference between the official rate and the rate paid.

What happens if you don’t repay the director’s loan?

If you don’t pay back a director’s loan within nine months of your company’s year-end, there may be a 33.75% Corporation Tax charge. It’s designed to discourage directors from holding onto company money too long. However, this tax can typically be reclaimed once the loan is repaid.

If the loan remains unpaid, it can get a bit more complicated. If the loan is written off or forgiven, it counts as a benefit in kind and is treated as taxable income for the director, with the company potentially liable for extra National Insurance contributions.

Bottom line? Having a solid repayment plan is key, whether that’s settling the loan within the financial year or setting up a structured schedule to pay it off over time.

Before entering into a director’s loan, whether that’s lending to or borrowing from the company, it’s always wise to chat with your accountant or financial adviser. They can help you work out whether it’s the right move and how to structure it to avoid unexpected costs.

It may also be worth exploring other funding options. A business loan or personal loan with a clear repayment structure could be a smarter choice, helping you access funds without some of the complexities of a director’s loan.

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