Most of what is written about directors' loans concerns money going the wrong way — out of the company and into the director's pocket, with a section 455 charge attached. Money travelling in the other direction, from director to company, is far more common in owner-managed businesses and attracts almost no attention. It also carries a tax trap that surprises people: charge the company interest, and the company must deduct 20% income tax at source and account for it to HMRC quarterly.
The loan itself is the easy part
A director lending money to their own company creates a creditor on the balance sheet and nothing else. There is no section 455 charge — that applies only to loans to participators. There is no benefit in kind, no dividend, and no tax on repayment, because repaying a loan is a return of capital rather than income. A director can lend £100,000 to the company and take £100,000 back two years later with no tax consequence whatsoever.
That simplicity makes it the cheapest form of funding available to most small companies, and the most flexible. It is also why the loan should be documented. A written agreement stating the amount, whether interest is payable, and the repayment terms costs nothing and settles three arguments in advance: with HMRC over whether the money was a loan or undeclared income, with a lender over ranking, and with a co-shareholder over what is owed to whom.
Interest: where the tax actually arises
Charging interest is optional. A director may lend interest-free, and many do. Where interest is charged, three things follow.
For the company, the interest is generally deductible against profits as a loan relationship debit — but a connected-party rule bites on timing. Where interest is accrued in the accounts and remains unpaid twelve months after the end of the accounting period, the deduction is deferred until it is actually paid. Accruing a large interest charge to reduce a corporation tax bill, then never paying it, does not work.
For the director, the interest is savings income. It is covered by the personal savings allowance — £1,000 for a basic rate taxpayer, £500 for a higher rate taxpayer and nil for an additional rate taxpayer — and taxed at their marginal rate above that. It must be reported on the self assessment return, with credit given for tax already deducted.
And for the company, the administrative obligation: because this is yearly interest paid to an individual, the company must deduct income tax at the basic rate of 20% before paying it, report it on form CT61, and pay the tax over to HMRC. Returns run to the quarter days — 31 March, 30 June, 30 September and 31 December — with the return and payment due within 14 days of the quarter end. Companies discover this obligation late with some regularity, typically when the accounts are being prepared and the interest has already been paid gross.
Interest or dividends?
For an owner-manager who has funded the company personally, interest is worth comparing with the alternatives rather than assumed to be inefficient. Interest is deductible for the company at 25% (or 19% below the small profits limit) and taxable on the director at 20%, 40% or 45%, with the savings allowance on top. A dividend is not deductible for the company at all and is taxed on the shareholder at 10.75%, 35.75% or 39.35%.
Run the arithmetic both ways before deciding. Where the company is paying corporation tax at 25% and the director is a basic rate taxpayer with savings allowance available, modest interest on a real loan is frequently the more efficient route — and unlike a dividend, it does not require distributable reserves, which matters in a company that has accumulated losses. The rate charged must be commercial; a rate set far above market invites HMRC to argue the excess is a distribution.
The points that matter outside tax
- Ranking on insolvency. A director's loan is an unsecured claim behind every preferential and secured creditor — in practice, usually worth nothing. Taking security is possible, but a charge granted to a connected party shortly before insolvency is vulnerable to challenge;
- Subordination. Bank facilities routinely require director loans to be subordinated and sometimes to be left undrawn for the life of the facility. Check before repaying yourself;
- Disclosure. Loans between a company and its directors are related party transactions requiring disclosure in the accounts, whatever the size, and a small company filing filleted accounts still discloses them in the accounts its members receive;
- Multiple shareholders. Where only one shareholder funds the company, the loan quietly changes the economics between them. Documenting it — including whether it carries interest — prevents the argument that arrives at exit;
- Repayment discipline. A loan repaid ad hoc whenever cash allows looks, to an inspector, indistinguishable from drawings. Repay on a stated schedule, through the loan account, with the ledger reflecting it.
Acumon deals with director funding, interest elections and CT61 obligations as part of corporation tax work, with the balance sheet treatment handled through statutory accounts. If you have funded your company personally and never documented it, that is a half-hour job that answers a question someone will eventually ask.