13th August 2026
For many owner-managed businesses, taking money in and out of a limited company is part of everyday life. However, it is important to remember that company money and personal money are not the same thing.
If you take money from your company that is not a salary, dividend, expense repayment or repayment of money you have previously put into the business, it will generally be treated as a director’s loan. This should be recorded through your director’s loan account.
Director’s loans can be useful, but without careful management they can also result in unexpected tax charges. Here are some of the common areas directors should be aware of.
One of the simplest mistakes is failing to keep an accurate record of money moving between you and your company.
Your director’s loan account should record money you borrow from the company as well as money you pay into it. At the end of the company’s financial year, any amount you owe the company, or that the company owes you, must be reflected and generally disclosed in the filed accounts.
Keeping these records up to date makes it much easier to understand your position throughout the year, rather than discovering an unexpected overdrawn balance when the accounts are prepared.
A limited company is a separate legal entity from its directors and shareholders. Taking money from the company without correctly treating it as salary, a dividend, an expense repayment or another permitted payment can create an overdrawn director’s loan account.
Importantly, money borrowed from the company remains repayable. This can still be the case if the company subsequently experiences financial difficulties.
This is why it is important to consider how funds are being extracted from the business before making withdrawals.
If you are both a shareholder and director and owe money to your company at the end of its Corporation Tax accounting period, the timing of repayment can have significant tax consequences.
Where the loan remains outstanding nine months after the end of the accounting period, the company may have to pay a Section 455 Corporation Tax charge. The rate at which this s.455 tax is charge is linked to the higher rate of dividend tax, currently 35.75% and is charged on the amount outstanding nine months after the year end.
The company can generally reclaim this tax once the loan has subsequently been repaid, released or written off, although there are rules governing when the relief can be claimed and any interest paid on the Section 455 tax cannot be reclaimed.
There are specific rules to prevent a loan being repaid, only to be taken again shortly after. Under such an arrangement, HMRC will treat the loan ‘repayment’ as applying to the later loan and so s.455 will generally apply.
Planning repayments and keeping track of the relevant dates can therefore make an important difference.
If the total balance of beneficial loans exceeds £10,000 at any point during the tax year, and the loan is provided either interest free, or low-interest, then the small-loan exemption will generally no longer apply and the loan will create a taxable benefit for the director.
The company will also have reporting and National Insurance obligations.
HMRC’s official interest rate for beneficial loans is currently 3.75% from 6 April 2026. Where interest is charged below the relevant official rate, the difference can form part of the taxable benefit.
This is an area that can easily be overlooked, particularly where a director’s loan balance changes regularly throughout the year.
Perhaps the biggest practical mistake is simply forgetting about the director’s loan account until the annual accounts are prepared.
By reviewing the account regularly, directors have more opportunity to understand how much is outstanding, consider the tax implications and decide on an appropriate course of action before important deadlines pass.
Strategies to clear overdrawn loan accounts often utilise multiple tax years and so planning for this during the accounting year can help to spread the tax cost.
The best way to avoid the loan account becoming overdrawn is to plan suitably ahead and structure income and dividend planning at the outset. There can then be certainty over income levels and we can advise what the income and tax implications are allowing you to budget for expenses.
If you have an outstanding director’s loan or are unsure about the tax implications of taking money from your company, the Thompson Jenner team can help you review your position and understand the options available to you.
