Business

What Is a Director’s Loan?

A director’s loan is money taken out of the company by a director that isn’t a salary, dividend, or expense repayment. This creates a Director’s Loan Account (DLA), which tracks the balance between what you owe the company—or what it owes you.

Depending on your account’s status, the tax treatment changes:

  • Overdrawn: You owe money to your company
  • In credit: The company owes you money

This blog focuses on what happens when your DLA is overdrawn and how that affects your tax obligations.

Tax Responsibilities When You Owe the Company Money

When you take a loan from your company, several tax implications can arise for both you and the business.

1. Loan Repaid Within 9 Months

If you repay the loan within 9 months after the end of your company’s Corporation Tax accounting period:

  • The company must declare the loan using Form CT600A in its tax return.
  • If the loan was more than £5,000 and you took another loan of £5,000+ shortly before or after repayment, your company may have to pay Corporation Tax at 33.75% of the loan (or 32.5% for loans before 6 April 2022).
  • Once the loan is permanently repaid, this Corporation Tax can be reclaimed, although any interest paid cannot be recovered.

For the director: There are no additional personal tax liabilities in this case.

2. Loan Not Repaid Within 9 Months

If the loan remains unpaid beyond the 9-month window:

  • The company must again use Form CT600A to declare it.
  • Corporation Tax at 33.75% (or 32.5%) is due on the outstanding loan amount.
  • HMRC will also charge interest on this tax until the loan is repaid or the tax is paid.

For the director: Still no direct personal tax obligations unless the loan is written off.

3. Loan Is Written Off or Released

If the company forgives the loan or goes into liquidation:

  • It must deduct Class 1 National Insurance Contributions (NIC) via payroll.
  • You must report the forgiven amount as income on your Self Assessment tax return and pay Income Tax accordingly.

Additional Scenarios That Trigger Tax

A. Loans Over £10,000 (£5,000 before 2014)

If your loan exceeds £10,000 at any point in the year and you’re also a shareholder:

  • The loan is treated as a benefit in kind.
  • The company must deduct Class 1 NICs.
  • You must declare it on your Self Assessment and may owe tax based on the official rate of interest.

B. You Paid Below the Official Interest Rate

If the interest you pay on the loan is less than HMRC’s official rate:

  • The company must record the shortfall as income and treat it as a benefit in kind.
  • You may be taxed on the difference between what you paid and the official rate.

Reclaiming Corporation Tax on Repaid or Written-Off Loans

If the company pays Corporation Tax on an overdrawn loan but later repays, writes off, or releases the loan, it can reclaim the tax—but not the interest.

When Can You Claim?

  • Earliest: 9 months and 1 day after the end of the accounting period in which the loan was resolved
  • Deadline: 4 years (or 6 years for loans settled before 31 March 2010)

How to Claim

  • Within 2 years: Use Form CT600A when preparing or amending your tax return
  • After 2 years: Use Form L2P, and submit it either with your latest return or separately

HMRC may issue repayment via the company’s nominated account or by cheque to the registered office address.

If You Lend Money to Your Company

On the flip side, if you lend money to your company, the tax treatment is simpler:

  • The company doesn’t pay Corporation Tax on the loan.
  • If you charge interest:
    • It’s a deductible expense for the company.
    • It’s taxable income for you.
    • The company must deduct Income Tax at 20% and report it using Form CT61.

Final Thoughts

Director’s loans can offer flexibility, but they come with tax responsibilities that shouldn’t be overlooked. Whether you’re borrowing from or lending to your company, make sure you:

  • Track your Director’s Loan Account accurately
  • Understand the timing and tax treatment of repayments
  • Stay compliant with both corporate and personal tax obligations

Get in touch with AccelUS to know more!

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