As a director, can I lend money to my limited company?

There may be times when your company needs funds for a purchase or an investment. Can you lend personal funds to your limited company, and how are interest payments treated for tax purposes?

Why would your limited company require a loan?

• You’re starting a new business, possibly with other directors, and you want to provide initial funding for the company.
• Your limited company is currently making a loss, and you want to inject some working capital into it.
• You want to buy equipment or another type of asset through the company, and there aren’t currently sufficient funds to pay for the asset, but there will be in the future.
• You want to bridge a short-term cash flow gap, for example, while awaiting payment from clients.
• You may want to avoid diluting your ownership by taking on external investors.

Is a director allowed to lend money to the limited company?

Yes, you can. In fact, this may be a preferable option compared to applying for a commercial loan from your bank.

Any loans are recorded in the company directors’ loan accounts. Similarly, if the company lends money to the directors, this is recorded in the same place, for accounting purposes.

In all cases, we recommend creating a loan agreement between the director(s) and the limited company, which is a distinct legal entity.

The agreement should detail the loan size, interest rate, term, and any other conditions. Although there is no obligation to do this, it creates a paper trail that may prove useful in the future.

Although it is unlikely if you have used model formation documents, make sure that your Articles of Association don’t prevent loans being made by the company’s directors.

Also, document board approval (even if you’re the sole director), to record the decision formally in board minutes for future reference.

Can you charge interest on a loan to the company?

Yes, you can. As this would be an unsecured loan, you could charge the company a commercial rate of interest. However, several things to bear in mind.

• If you are running a fledgling business, you wouldn’t want to saddle the company with unreasonable interest payments, as this would harm cashflow.
• When calculating the loan’s repayment period, again, consider how the duration would affect the company’s cash flow. If the business is new, a longer term may be a more sensible option.
• And, of course, you don’t need to charge any interest at all.

How are the interest payments treated for tax purposes?

For the limited company, the interest payments are treated like any other loan (such as one granted by a bank). These costs are tax-deductible against the company’s Corporation Tax bill.

If you charge interest, the company must:

• pay you the interest less Income Tax at the basic rate of 20%
• report and pay the Income Tax every quarter via form CT61 (you can request the form from HMRC here).

So, if the interest payable for the quarter is £100, the director will receive £80, and HMRC the other £20. If the director is a basic rate taxpayer, there will be no further tax to pay on this income.

If you are the director making the loan,  you must include any interest you receive from the company on your annual self-assessment return.

Other things to consider when lending cash to your company

• If you make a director’s loan to your company, the amount will be included on the company’s balance sheet (as a creditor).
• Your company can repay a loan at any time if the directors decide to do so. The amount showing as a creditor on the balance sheet will be reduced until it is fully paid.
• If you want the company to repay (or part repay) a loan at any time, make sure there are sufficient funds in the company to meet its ongoing liabilities, such as tax.
• When considering any aspect of lending money to your company – and how you conduct transactions related to loans, don’t forget that limited company directors are obliged to always act in the best interests of the company.
• Repayments of the loan itself are not taxable for the director, as they simply return capital.
• Interest paid may be subject to late payment interest or penalties if not reported and paid to HMRC on time via CT61.
• If the company becomes insolvent and cannot repay the loan, you may lose the funds unless secured creditor status was arranged (which is uncommon for director loans).

Always ask your accountant if you are unsure about any aspects of lending money to your company (or if you want to borrow money from the company).