Director’s loans – A useful tax tool but not without its risks

Director’s loans can be a helpful way for business owners to access funds, but they come with tax risks if not handled properly.  

With HM Revenue & Customs (HMRC) set to increase the official interest rate for beneficial loans from 2.25 per cent to 3.75 per cent in April 2025, it is more important than ever for directors to tread carefully. 

Understanding director’s loans 

A director’s loan occurs when money is taken from the company outside of salary, dividends, or reimbursed expenses.  

While it may seem like a quick cashflow solution, improper management can trigger tax liabilities. 

Unpaid loans and the Section 455 charge 

If a director’s loan is not repaid within nine months and one day after the company’s accounting period ends, the company must pay a tax charge under Section 455 of the Corporation Tax Act 2010 (the Act).  

This charge is currently 33.75 per cent of the outstanding loan amount. 

How to avoid it: 

• Repay the loan within the nine-month window. 

• Consider alternative ways to clear the debt, such as taking a dividend or salary increase – but check for personal tax implications first. 

The hidden cost of low-interest loans 

If a company provides a director with an interest-free or low-interest loan, the difference between the interest paid and HMRC’s official rate is classed as a Benefit in Kind (BIK). 

This can result in: 

• Additional Income Tax for the director. 

• Class 1A National Insurance contributions (NICs) for the company. 

How to avoid it: 

• Charge interest at or above HMRC’s official rate to prevent a taxable benefit. 

• Ensure any beneficial loans are properly reported through payroll and benefits declarations. 

The tax consequences of writing off loans 

If a company writes off a director’s loan, the amount is treated as income. This means: 

• The director will be taxed on the written-off sum, as if it were a salary or dividend. 

• The company may also face tax charges on the amount. 

How to avoid it: 

• Plan carefully before writing off loans. 

• Explore other repayment strategies that could be more tax-efficient. 

The rising cost of borrowing from your own company 

From April 2025, HMRC will increase the official rate for beneficial loans, making director’s loans more expensive.  

The rate under the precise method will rise to 3.75 per cent, while the averaging method remains at 2.25 per cent (subject to confirmation). 

How to minimise costs: 

• Use the averaging method if it continues to offer a lower rate. 

• Compare director’s loans against alternative borrowing methods, such as commercial loans or dividend payments. 

With the upcoming interest rate changes, now is the time to review your approach. Need tailored advice?  

Our tax specialists can help you with director’s loans and optimise your financial planning. Contact us today for further assistance.