“Director's loan” is used for two quite different things: money a director lends to their company, and money a company lends to its director (often by the director drawing more than their salary and dividends, leaving the director's loan account overdrawn). The legal and tax rules are very different depending on which way the money is going, and a lot of confusion comes from mixing them up.
Lending money to your company
A director can lend money to their own company, and it is common in owner-managed businesses, especially early on. Company law doesn't require members' approval for a loan from a director to the company, and there is no special tax charge on the director for lending, including interest free.
It still makes sense to put the loan in writing. A short loan agreement should record the amount, whether interest is payable and at what rate, when and how the loan is to be repaid, whether it is repayable on demand, and whether it is secured. The directors should also minute the board's decision to accept the loan, with the lending director declaring their interest. The reason is evidence. If the company later fails or you fall out with your co-shareholders, a liquidator or the other shareholders may argue that the money was really a capital contribution or share subscription rather than a loan, and a written agreement answers that.
If the company does fail, an unsecured director's loan ranks alongside other unsecured creditors, which often means getting little back. You can take security, such as a charge over the company's assets, but a company charge must be registered at Companies House within 21 days of creation. There are also insolvency rules to be aware of. Repaying a director's loan ahead of other creditors while the company is in difficulty can be challenged as a preference, and a floating charge granted to a director for money already lent may be invalid if the company goes into insolvency within the following two years, except to the extent of new money provided. Take advice before repaying yourself or taking security if the company's finances are under strain.
Charging interest to your company
You don't have to charge interest, and charging none doesn't create a tax problem for you. If you do charge interest, it is taxable income in your hands, and the company can usually deduct it for corporation tax, subject to timing rules that can delay the deduction where interest owed to a connected person isn't actually paid promptly. Where a company pays yearly interest to an individual, it generally has to deduct income tax at the basic rate, pay it to HMRC and report it on form CT61, then give you a certificate of the tax deducted. A commercial rate is easier to justify to the other shareholders and to HMRC than an unusually high one.
Borrowing from your company: the Companies Act 2006
Under section 197 of the Companies Act 2006, a company may not make a loan to one of its directors (or a director of its holding company), or give a guarantee or security for a loan made to them by someone else, unless the transaction has been approved by a resolution of the members. Before the resolution is passed, the members must be given a memorandum setting out the nature of the transaction, the amount of the loan and its purpose, and the extent of the company's liability. No approval is needed from the members of a wholly-owned subsidiary.
There are exceptions in sections 204 to 209, including loans to fund expenditure on company business, loans to cover the cost of defending proceedings or regulatory investigations, and minor loans where the total outstanding to the director and connected persons does not exceed £10,000 (section 207). Public companies and companies associated with them are also caught by further rules on quasi-loans and credit transactions, and on transactions with persons connected with a director.
If a loan is made without the required approval, it is voidable by the company, and the director (and any director who authorised it) can be liable to account for any gain and to indemnify the company against any loss. The members can affirm the transaction within a reasonable time afterwards. In a small company where the director is also the only shareholder, approval is easy to give, but it still needs to be given and recorded.
Advances and credits to directors must also be disclosed in the notes to the company's annual accounts under section 413 of the Companies Act 2006.
Borrowing from your company: section 455 tax
If a close company (broadly, one controlled by five or fewer participators, or by participators who are directors, which covers most owner-managed companies) lends money to a participator such as a director-shareholder, and the loan is still outstanding nine months and one day after the end of the accounting period in which it was made, the company has to pay a tax charge under section 455 of the Corporation Tax Act 2010. The rate is linked to the dividend upper rate and has changed over time, so check the current rate on GOV.UK or with your accountant rather than relying on an older figure.
The charge is temporary in the sense that it is refundable. Once the loan is repaid, released or written off, the company can reclaim the tax, but only nine months and one day after the end of the accounting period in which the repayment happens, so the money can be tied up for some time. There are anti-avoidance rules aimed at repaying a loan just before the deadline and then drawing the money out again soon afterwards, so short-term “bed and breakfasting” of the loan account doesn't work.
If the company writes the loan off, the director is usually taxed on the amount written off as if it were a dividend, and there can be National Insurance consequences too.
Borrowing from your company: benefit in kind
If a director (or any employee) has an interest-free or cheap loan from their company, and the total of such loans outstanding exceeds £10,000 at any time in the tax year, the difference between the interest actually paid and interest at HMRC's official rate is treated as a taxable benefit. It must be reported to HMRC, and the company pays Class 1A National Insurance on it. HMRC publishes the official rate and it changes from time to time, so check the current figure. Paying interest at or above the official rate avoids the benefit charge.
Keeping it tidy
Whichever direction the money flows, keep a clear director's loan account in the company's books, record each advance and repayment, and make sure the board and, where needed, the members have approved it. Loans the company makes to you raise company law, corporation tax and income tax questions together, and your accountant should be involved before the money moves, not at the year end. If the company is in financial difficulty, or you are considering taking security or repaying yourself, speak to a solicitor or insolvency practitioner first.
If you have a written loan agreement between you and your company, you can upload it for a loan agreement review that checks the repayment, interest, security and default terms. It reviews the contract rather than your tax position, which is a question for your accountant.
Related: what the loan agreement review covers, and a complete sample report.