There may be times when you need to borrow money from your own limited company, or you may have unintentionally done so whilst drawing down funds. What are the tax implications of doing so?
In this guide, specialist accountants Intouch Accounting explain that while you can borrow money from your company, you should be aware of the tax implications of doing so.
We have updated this article to reflect 2025/26 tax and interest rates.
Borrowing money from your company – a director’s loan
In practice, many contractors borrow money from their company, some for relatively short periods, whilst others borrow large sums for a long period.
If you are inclined, for whatever reason, to borrow money, you should first consider whether you are leaving enough cash in the company for it to pay its liabilities, especially tax bills, on time.
As good practice, you should record the loan taken and the terms of the loan in a Director’s Resolution.
Although largely procedural, it serves to formally document the loan at the time it is made. Under the Companies Act, a loan of £10,000 or more normally requires shareholders’ approval.
You may be taxed on the benefit
If overall, the amount you owe is more than £10,000 and is either interest-free or at an interest rate that is lower than an officially published rate (3.75% for the 2025/26 tax year), then you will incur a taxable benefit in kind.
The value of the benefit in kind is calculated in accordance with HMRC rules and reported on form P11D at the end of the tax year (unless payrolled). This amount is added to your personal income and taxed at your highest marginal rate.
The company also incurs Class 1A employer National Insurance at 15% of the cash equivalent of the benefit.
What taxes will the company be liable for?
If the director’s loan remains outstanding for a long period, the company may become liable for an additional Corporation Tax charge.
If you are a director and/or a shareholder, you are called a Participator.
If any loan at year-end to a Participator, or an associate of a Participator, remains outstanding 9 months and 1 day after the end of the company’s accounting period, the company must pay an amount of Corporation Tax equal to 33.75% of the amount still outstanding (32.5% if the loan was made before 6 April 2022).
The payment is often referred to as a Section 455 charge.
The Section 455 tax can be reclaimed once the loan is repaid to the company.
However, HMRC does not make repayment until 9 months and 1 day after the end of the accounting period in which the loan is repaid. If you repay part of the loan, a proportionate part of the Section 455 tax paid is repaid.
Summary of director’s loan tax triggers
| Situation | Personal tax position | Company tax/NIC | Key timing point |
|---|---|---|---|
| Loan balance under £10,000 | No beneficial loan charge | None | Ongoing |
| Loan over £10,000 and interest-free or cheap | Benefit in kind taxed at marginal income tax rate | Class 1A NIC at 15% on cash equivalent | P11D after tax year end |
| Loan outstanding 9 months + 1 day after accounting period end | None directly | Section 455 charge at 33.75% (32.5% for pre-6 April 2022 loans) | 9 months + 1 day after year end |
| Loan written off (shareholder-director) | Treated as a dividend/distribution | No National Insurance due | At write-off |
| Loan written off (director only, not shareholder) | Treated as employment income under PAYE | Class 1 NIC may apply; employer NIC deductible for Corporation Tax | At write-off |
What happens if your company ‘writes off’ a loan?
New rules introduced in 2013 affect how loans are treated when repaid and effectively replaced with new loans, particularly when repayment is followed shortly by further borrowing.
If the loan is written off and never repaid to the company, the amount will be treated in accordance with your relationship with the company.
If you are a shareholder and a director (the normal situation for limited company contractors), the written-off amount is normally treated as a distribution for income tax purposes, and no National Insurance is due.
If you are only a director (and not a shareholder), the written-off amount is treated as earnings. It must be put through PAYE, and Class 1 National Insurance may apply.
The company would then be entitled to deduct the gross amount and employer’s NIC from its profits and receive Corporation Tax relief.
We recommend that you speak to your accountant before writing off any loans to decide the best way forward.
Further points to note
Loans made to friends and family may differ from the above.
Loans made to your spouse are often taxed as though they were made to you, but if the loan is made to a friend or a more remote member of the family, then in some limited circumstances the loan may not be taxed in the way described above.
There are also other limited exemptions for loans taken for specific qualifying purposes.
You should discuss the purpose of any loan with your accountant to explore any opportunities that may limit either the benefit in kind or Section 455 charges.
Read HMRC’s official guide to director’s loans for further information.
Thanks to Intouch Accounting for providing these answers. Intouch is a specialist contractor accounting firm, a member of the FCSA (Freelancer and Contractor Services Association) and a member of the ICAEW Practice Assurance scheme. The original article has been updated to reflect the latest tax and interest rates (2026).
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