How to get the best from your directors' loan account
A directors’ loan account lets you put your own money into your business or take it out, but how can you manage it effectively?
Your directors' loan account can affect the financial health of your business, so here’s our guide to help you understand how directors’ loan accounts operate and how you can get the most out of yours.
What’s a directors’ loan account?
A directors’ loan account keeps a record of money that directors put into the business or withdraw from it. Directors’ loans are separate from other money that you might receive from your business, for example a salary, dividend payments or repayments for business expenses.
Directors’ loans let you lend the business money to help with cash flow, or receive a personal loan. The account is in debit when the director owes the business money, and in credit when the director has taken a loan out.
Give us a call if you need advice on a director’s loan and how it will affect your personal and business tax position.
In this guide, we’ll look at how directors’ loans work when they’re in debit or credit and how you can make informed decisions about your directors’ loan account.
Taking money out
As a general rule, directors shouldn’t be paid more in dividends than your business makes in profit. The same applies to going overdrawn on your directors’ loan account. Going overdrawn can have significant tax implications, so we recommend avoiding it.
If you’ve made a director’s loan to the business, you can take repayment without any tax implications. However, your account becomes overdrawn if you take out more money than the account holds, meaning it works in the same way as a standard bank account.
The tax rules vary depending on the size of your business. However, if your directors’ loan account becomes overdrawn, the business is effectively giving you an interest-free loan. To discourage this, HMRC applies a corporation tax charge of 35.75% for loans made on or after April 6, 2026, and 33.75% for loans before that date, so your company pays more tax. It’s one of the few tax charges that you can claim back as long as the loan is repaid. This can take a long time, so it’s best avoided.
HMRC can also treat the loan as a benefit in kind for your personal tax return, meaning you’ll pay tax on the interest you would have paid if you’d taken out a standard commercial loan. There are exceptions for loans of less than £10,000 throughout the tax year, or if the business charged interest.
Record keeping and disclosure
Directors’ loan accounts are subject to tax reporting on your corporation tax and personal income tax returns. The rules for directors’ loan accounts are set out in the Companies Act 2006, which adds further reporting and disclosure requirements. This means you must keep records of all loans, including the amounts, any interest charged, or other conditions that applied to the loan, and when the loan was repaid or written off.
Keeping clear and accurate records can help to protect you and your business from paying too much tax or incurring a charge that may take time to claim back.
When your account is in credit
If your directors’ loan account is in credit, that means the business owes you money. You can charge interest on the loan at a reasonable rate if you want to increase the repayments you receive. This can affect both your personal and business tax position. Interest on loans is an allowable business expense for corporation tax purposes and can also help you with your personal tax planning. The tax credits and rates that apply can be complex and create additional tax paperwork.
Talk to us to help you find the right balance between your business and tax affairs and ensure you complete the right HMRC paperwork. Again, keeping accurate records of every loan transaction and interest payment is essential.
Talk to your accountant
Directors’ loans and interest form part of your directors’ remuneration package, which may also include a salary, dividends, expense payments and additional perks such as health insurance or a company car. Planning ahead can give you a tax-efficient package and help you understand what you’ll need to pay when you submit your tax return.
The same applies to your accounts. With the introduction of Making Tax Digital, you’re likely already preparing your accounts using accounting software. However, consulting your accountant before you complete your accounts and submit your tax returns will help you avoid any unexpected charges and ensure you pay the right amount of tax.
Whatever stage you’re at with your accounts and tax return,we’re here to help. Book a free consultation now or call us on 01664 503 700.