As a director, you might think lending money to your company is straightforward: you put cash in, the company uses it, everyone's happy. But in reality, directors' loans are one of the most heavily regulated areas of company law in the UK. Get them wrong, and you could face unexpected tax bills, Companies House penalties, or worse—accusations of wrongdoing.
This guide covers what you absolutely need to know about lending to your company, including the rules that trip up most directors and how to avoid them.
What is a directors' loan?
A directors' loan is money lent by a director to their company. It's different from salary, dividends, or share capital. The key distinction: it's a loan, which means it must be repaid. The company owes the director money, with interest if the director chooses to charge it.
This is perfectly legal and common. Many companies borrow from their directors when they need cash but can't access bank funding. The problem arises when directors either don't document the loan properly or treat it as something it's not (like a gift or informal overdraft).
The legal formalities you can't skip
Under the Companies Act 2006, any loan from a director to the company must be properly documented. This means you need a written loan agreement setting out the amount being lent, the date of the loan, the interest rate (if any), the repayment terms, and whether the loan is secured or unsecured.
Without a written agreement, HMRC and Companies House will treat an informal directors' loan with suspicion. If the company goes into administration, an undocumented loan might not be recognized as a legitimate debt, and you could lose your money.
Interest: why it matters
Many directors lend money interest-free. That sounds generous, but it creates problems. If you charge no interest, HMRC might argue that you've made a gift of the use of your money—which triggers a different tax treatment.
More importantly, charging a reasonable rate of interest (at least the Bank of England base rate plus a margin) protects you. It demonstrates that the loan is genuine, not a hidden way to extract profits from the company. It also provides a tax deduction for the company, which can offset corporation tax.
Tax implications and section 455 notices
If you make a loan to your company and it remains outstanding at the end of the accounting period, HMRC issues a "section 455" notice. This means the company must pay a 25% tax charge on the amount lent. This is where many directors get caught out.
HMRC's logic is simple: they're preventing directors from using their companies as cheap interest-free overdrafts. The 25% charge applies until the loan is repaid or written off. If the company repays the loan within nine months of the year end, you can recover the 25% tax. But if repayment takes longer, the company keeps the tax bill.
Companies House disclosure requirements
Directors' loans must be disclosed in your company accounts. These are public documents, and competitors can see them. While disclosing a legitimate loan isn't a problem, missing the disclosure is. Companies House and HMRC scrutinize accounts for missing loan disclosures as a red flag for informal arrangements.
Best practice: document everything
The golden rule is simple: treat your company's loan to you the same way you'd treat a loan from a bank. Have a written agreement. Charge a reasonable interest rate. Keep records of payments. Disclose it in your accounts.
For a detailed review of your loan documentation and tax position, upload your agreement to QuickLegalCheck for a professional assessment of compliance and risk.