Looking to take a loan out of your limited company?
If you’re a director, it’s perfectly normal to borrow a bit of cash from time to time from your company. But there are rules to follow. Here, we’ll walk you through the key things to watch out for – how and when to repay, what happens if you don’t, and how to limit the tax liabilities.
What is a director loan?
This is a catch-all phrase used when you owe money back to your company. This could be intentional, for instance if you need some extra cash in the short term and don’t want to withdraw dividends, or accidental – like overpaying your salary for a month or making a personal payment from a company bank account. For small accidental payments it’s often easiest to repay the money to the company straight away, but for larger payments that may not always be feasible.
When do I need to repay my loan?
To avoid unnecessary tax liabilities, you need to know when the loan must be repaid. There are two key deadlines:
1. The company’s year end
If you have a director loan outstanding at the year end, your accountant will have to disclose it in the year-end accounts. This doesn’t affect the tax treatment, but it’s worth being aware of, as the accounts become publicly visible once filed.
2. The accounts filing date for the year the director loan was withdrawn
The loan must be fully repaid before the company’s accounts are filed. As the filing deadline is nine months after the year end, this gives you around nine months from the end of the accounting year to repay it.
For example: if your company’s year end is 31 March and you withdrew the loan in January, you’d need to repay it by 1 January the following year (which is 9 months and 1 day after the year end). Ideally, you should repay a few weeks before this deadline to give your accountant time to finalise and file the accounts.
What if I don’t repay the loan in time?
If you don’t repay the loan before the year end accounts filing deadline, the company will be hit with temporary corporation tax (known as S455 tax) on the outstanding loan. This is currently charged at 33.75% – so definitely worth avoiding!
While the S455 tax can be reclaimed once the loan is repaid, it can take a long time. The earliest the S455 tax on a repaid loan can be reclaimed is 9 months and 1 day after the end of the accounting period in which you repay the loan. That means it could be well over a year before the money comes back.
We will always let you know if you have a director loan that needs to be repaid before we file the accounts.
What if I don’t repay the loan in time?
To count as properly repaid, the director loan needs to:
- Be fully (or mostly) cleared – your accountant will confirm the amount
- Not be replaced by another loan within 30 days
People thought a way around this tax charge was to temporarily repay the loan within the given timeframe to avoid the S455 charge and then take a new loan out shortly after. HMRC caught on to this quickly and put the ‘bed & breakfasting’ rules in place. Without going into the nitty gritty, essentially, when repaying a loan, if the intention is there to take a new one out soon after, the repayment will not count and it will be treated as a continuation of the original loan. In other words, taking out the second loan resets the clock and can trigger S455 tax anyway.
Declaring dividends to clear your director’s loan account can be an effective solution, but it also resets the clock for any bed and breakfasting rules. Timing is everything here, so speak to us if you’re unsure.
What if I can’t repay in time?
If the deadline’s approaching and you don’t have the cash to repay, we might be able to convert some (or all) of the loan into dividends. Think of it like you’re withdrawing dividends from the company and immediately using them to repay the loan – no money needs to actually change hands.
The company must have enough reserves to cover the dividends – we’ll advise you if this is an option. However remember the dividends declared will be subject to personal tax.
Is interest charged on the loan?
It depends. If your director’s loan balance never exceeds £10,000 at any point, you don’t need to charge interest – so it can be a handy short-term tool.
But if the loan balance goes over £10,000 at any time, the company must charge interest at HMRC’s official rate, to avoid it being treated as a taxable Benefit in Kind (BIK).
This interest must be paid – not just accrued – and is charged on the entire loan balance, not just the amount over £10,000. So if you’re getting close to the threshold, keep a close eye on your withdrawals. Even a small overpayment could land you with interest and BIK implications.
Can I use director loans to my advantage?
Yes, in the right circumstances. Director loans can be useful for short-term cash flow or year-end tax planning. For example, if you’ve used up your basic rate tax band but still need funds before 5 April, taking a director loan now and converting it to dividends in the new tax year might save you higher-rate tax.
But this strategy does carry risks, especially if you’re planning to stop contracting or trading soon. Don’t rely on “kicking the can down the road” if the business might be winding up. Timing and planning are everything here.
In short
Director loans can be a smart way to access company funds, but they come with strict rules. To stay on the safe side:
- Keep the balance under £10,000 if possible
- Repay within nine months and one day of the end of the accounting year the loan was taken
- Physically pay any interest due – don’t just record it on paper
- Avoid bed and breakfasting traps
And if you’re ever unsure, just ask us. It’s always better to check than to get hit with a tax charge later.
