How Directors Can Borrow from Their Company Tax-Efficiently

Introduction

For directors of owner-managed or family-run businesses, accessing cash flow can often be achieved through a director’s loan from the company. When done correctly, this method can provide personal liquidity at minimal cost—often far cheaper than traditional lending. While there are tax rules to navigate, careful planning can result in significant savings.

What is a Director’s Loan?

A director’s loan is an amount taken from the company by a director that is not salary, dividend, or a reimbursed expense. It includes overdrawn director current accounts. While legally permitted, this type of transaction is closely monitored by HMRC to ensure it’s not misused as a form of tax-free income.

The Section 455 Corporation Tax Charge

Under Section 455 of the Corporation Tax Act 2010, a tax charge applies to loans made by close companies to their directors or shareholders—referred to as “participators.” If the loan is not repaid within nine months and one day of the accounting period end in which it was made, the company must pay tax at a punitive rate.

Rate: 33.75% of the loan balance
Applicable: On loans made on or after 6 April 2022

This charge is temporary and reclaimable once the loan is fully repaid, though cashflow implications can be significant for the company.

Benefit in Kind (BIK) Implications

If the total loan balance exceeds £10,000 at any time during the tax year and is interest-free or carries a rate below the official HMRC rate, a benefit in kind arises. This means:

The director pays income tax on the deemed benefit
The company pays Class 1A National Insurance on the benefit

As of the 2024/25 tax year, the official rate is 2.25%, though HMRC has announced it will begin reviewing and updating this quarterly from 2025/26 onwards.

Anti-Avoidance Measures

HMRC has implemented rules to prevent circumvention of the tax charge by briefly repaying and quickly reborrowing the loan. These apply when:

Repayment is followed by reborrowing within 30 days
There was an intention to reborrow the funds at the time of repayment

However, transactions involving amounts below £5,000 are not caught by these rules, offering some scope for legitimate short-term planning.

Case Study: Emma’s £35,000 Loan

Scenario: Emma is a director of a consultancy company with a 31 March year-end. On 2 April 2024, she borrowed £35,000 from the company. The loan was repaid on 10 December 2025—well within nine months of the 31 March 2025 year-end, thus avoiding the Section 455 charge.

Tax Impact Breakdown

2024/25: Loan outstanding for 364 days. BIK = £788, Tax (40%) = £315.20, Class 1A NIC = £108.74 (13.8%)
2025/26: Loan outstanding for 253 days. Assuming 2.25% rate holds, BIK = £543, Tax = £217.20, NIC = £81.45 (15%)

Total cost for Emma: £532.40 in income tax

Total Class 1A NIC cost to company: £190.19

Combined cost for 20-month loan: £722.59—an effective interest rate of just over 1.03%.

Key Takeaways for Business Owners

Ensure loans are repaid within 9 months and 1 day of year-end to avoid the 33.75% s455 tax
If loans exceed £10,000, be prepared for BIK and NIC costs
Charge interest at or above the official rate to eliminate BIK entirely
Keep track of repayments and avoid reborrowing within 30 days
Use the £5,000 exemption rule strategically for smaller borrowing needs

Conclusion

Director’s loans can be a valuable financial tool if used responsibly and with awareness of tax implications. With careful planning, directors can enjoy access to company funds with minimal tax costs—often much lower than a bank loan or personal credit facility. As always, professional advice should be sought to tailor the strategy to your specific company structure and cashflow needs.

Looking for tax-efficient strategies for your business? Get In Touch with our Advisory Team to explore your options today.