Maximising the benefits of directors’ loans for your business 

You might currently be considering ways to address short-term personal cash needs for financing business initiatives such as office renovations or expanding product lines.  

Instead of relying on your regular salary, dividends, or reimbursed expenses, directors’ loans offer a unique way to access funds directly from your company. 

Accurately recording these loans as liabilities on the company’s balance sheet and adhering to the agreed repayment terms is essential.  

To avoid penalties and scrutiny from HM Revenue & Customs (HMRC), it is crucial to follow recommended best practices. 

Key guidelines for directors’ loans 

We strongly recommend you follow the best practices we’ve listed below:  

• Approval and documentation: For loans exceeding £10,000, secure shareholder approval and thoroughly document the loan terms, including the amount, interest rate, repayment schedule, and purpose. 

• Tax implications: Report loans over £10,000 as a benefit in kind on your self-assessment tax return. Your company will need to pay Class 1A National Insurance on these loans. If the interest rate is lower than HMRC’s official rate (currently 2.25 per cent), the difference becomes a taxable benefit in kind. 

• Section 455 Tax: If the loan is not repaid within nine months of the end of the company’s accounting period, the company is required to pay Section 455 Tax at 32.5 per cent on the outstanding amount. This tax is reclaimable once the loan is repaid. 

• Repayment obligations: Adhere to the agreed repayment terms to avoid financial and legal repercussions. Setting up a direct debit can ensure timely repayments. 

• Annual disclosure: Include all directors’ loans in the company’s annual accounts, specifying loan amounts, interest rates, repayment schedules, and outstanding balances. 

Using company dividends to repay the loan can be tax-efficient if the company has sufficient distributable reserves.  

However, you should consult with your accountant before proceeding to avoid loan cycling, which HMRC closely monitors.  

Loan cycling, where you repay and then immediately re-borrow the loan, may be considered as not repaid by HMRC, resulting in tax penalties. 

Always aim to repay the loan before the nine-month deadline post-accounting period to avoid Section 455 Tax.  

Additionally, charging an interest rate at or above HMRC’s official rate can help you avoid ‘Benefit-in-Kind’ (BIK) tax implications. 

If you need assistance, we can offer you support in preparing and reviewing your company’s annual accounts, ensuring all directors’ loans are correctly disclosed and reported.  

Our team is here to help you leverage directors’ loans effectively to benefit your business while steering you clear of potential pitfalls. 

Please get in touch with our team for expert guidance or more information.