Director loan account rules for a small UK limited company

Two official HMRC sources gave me different rates for the same tax when I read them this month, and the tax sits at the centre of the director loan account rules. The GOV.UK guide on director's loans still quotes 33.75%, while HMRC's Company Taxation Manual gives 35.75% for advances made since April.

Both describe the charge a close company pays when a director who is also a shareholder owes it money and does not repay in time. I come back to the gap between them near the end.

An overdrawn loan account carries a tax charge, and the charge comes with a deadline. Repay within nine months of the year end and no charge arises; miss that window and the company pays tax on what is still owed.

For an owner who runs the company from abroad, the risk is mostly practical. Personal costs paid from the company account, a transfer home never booked as salary or a dividend, a card used for both: each one ends up in the loan account.

The practical habit follows from that, ahead of any rule. Reconcile the loan account every month, not only at the year end, and do not let a personal payment from the company sit unexplained until the accounts are drawn up.

What counts as a director's loan?

A director's loan is money a director or a close family member takes from the company that is not salary, a dividend, an expense repayment or a return of money already put in. GOV.UK defines it that way.

Family members are named on purpose. Section 455 reaches associates of a participator as well as the participator.

The guide attaches a record duty in one sentence: “You must keep a record of any money you borrow from or pay into the company - this record is usually known as a ‘director’s loan account’.”

The record need not be elaborate. A ledger account with each payment out and each repayment in fits the GOV.UK description, as I read it.

The balance goes on the balance sheet at the year end. Section 413 of the Companies Act 2006 adds that the notes to the accounts must give details of advances to directors, including the amount, an indication of the interest rate, the main conditions and any amounts repaid.

No written loan agreement is needed for a loan to exist. Section 455 of the Corporation Tax Act 2010 treats a close company as making a loan where a person simply incurs a debt to it.

That clause is the one I watch most closely for owners abroad. A personal invoice paid by the company is, as I read it, a loan from that day.

The direction of the balance decides everything else. An overdrawn account means the director owes the company. An account in credit means the reverse.

A credit balance comes from the opposite habit, when a director pays a company bill from a personal card and the company then owes that amount until it is repaid.

Do director loan account rules need shareholder approval?

Company law asks for approval before any tax question arises, and the director loan account rules in the Companies Act are stricter than many owners expect. Section 197 says a company may not make a loan to a director “unless the transaction has been approved by a resolution of the members of the company”.

The section also reaches guarantees and security the company gives for a loan made to a director by someone else, such as a bank.

A memorandum must back the resolution. Section 197 lists what it shows: the nature of the transaction, the amount and purpose of the loan, and the extent of the company's liability under any connected transaction.

With a written resolution, the memorandum must reach every eligible member no later than the resolution itself.

Small loans escape the approval requirement altogether. Section 207 removes the need for approval when the loan, added to other relevant transactions with that director, does not exceed ten thousand pounds.

In a company with one director who owns every share, I would still put the resolution in writing, because the paper shows the members approved the loan before the money moved.

When does s455 tax become payable?

S455 tax becomes payable nine months and one day after the period of the loan ends, if the loan is still outstanding then. The statute fixes the date as “on the day following the end of the period of 9 months from the end of the accounting period in which the loan or advance was made”.

Its rate is not written into the section as a number. Section 455 sets the percentage that “corresponds to the dividend upper rate” for the year of the loan.

That link explains the change this year. HMRC's manual gives 33.75% for loans made from April 2022 and the higher rate from 6 April 2026, so each advance carries the rate of its own date.

Who is caught matters as much as the rate. The charge applies to a participator in a close company, or an associate of one. An owner-director holding shares is a participator.

Section 456 sets out the exceptions, and few fit a small owner-managed company. One covers money-lending businesses lending in the ordinary course, and another covers loans up to fifteen thousand pounds to a full-time worker with no material interest in the company.

Section 457 draws the material interest line at more than 5% of the ordinary share capital, so an owner who holds the shares falls outside that second exception.

The same manual adds a detail I had to read twice: “The charge applies to a debt created or loan made in an accounting period (AP) rather than the total amount outstanding at the end of the AP”. A balance carried over from an earlier year is not charged again.

Take a hypothetical company with a December year end whose director-shareholder draws twenty thousand pounds in June 2026 and repays nothing. On my arithmetic the charge would be £7,150, due on 1 October 2027. Had the director repaid by 30 September 2027, nothing would be due, though the balance would still appear on form CT600A.

On the same manual page, the worked example still uses the rates of 2015 and 2016.

Form CT600A carries the balance with the Company Tax Return, whether or not tax ends up due. If the tax is paid late, the GOV.UK guide warns that “Interest on this Corporation Tax will be added until the Corporation Tax is paid or the loan is repaid.”

How does the company get the tax back after repayment?

The company can reclaim the tax once the loan is repaid, written off or released, but the refund waits. Section 458 gives the relief, and where repayment comes after the tax fell due, it holds the relief back until nine months after the end of the period of repayment.

The GOV.UK guide is blunt about that timing: “You will not be repaid before this.” Interest charged on late tax is gone for good, since the guide says the company cannot reclaim it.

A claim has its own time limit. Section 458 says it “must be made within 4 years from the end of the financial year in which the repayment is made”.

The form depends on how much time has passed. Within two years of the end of the period of the loan the claim goes on form CT600A, and after that, or for a different accounting period, the guide points to form L2P.

With the company run from abroad, the refund method matters too. HMRC repays either to the details given in the latest Company Tax Return or by cheque to the registered office, so I would always put bank details in the return.

Why does repaying and borrowing again not clear the charge?

HMRC matches repayments against new borrowing when the two sit close together, so a short round trip leaves the original loan in place. The Company Taxation Manual calls this bed and breakfasting, and it describes a mechanical test and a wider backstop aimed at it.

The mechanical test applies where, within any thirty-day period, repayments of five thousand pounds or more meet new loans of the same size or more made after the end of the earlier accounting period.

The manual's first example shows the effect in a sentence: “The legislation will match the repayment against the new loan.” The old balance stays outstanding and stays chargeable.

The backstop catches gaps longer than thirty days. It applies where at least fifteen thousand pounds is owed before a repayment and arrangements already exist for at least five thousand pounds of new lending.

HMRC leaves the key word open: “‘Arrangements’ is not further defined and has a wide meaning.” The same page tells officers to look at board minutes, notes of contacts with bankers and the bank statements of both the company and the participator.

It also says something I have thought about more than once for long-running accounts: “There are no time limits to the application of CTA10/S464ZA (3).”

The manual adds that both tests may need checking several times in one period where repayments and new advances keep repeating.

I tried to trace the statute behind these pages and hit a small puzzle. The arrangements page ends by referring to section 464C, but legislation.gov.uk marks that section as omitted since October 2024, while the manual's own headings cite section 464ZA.

What does the director pay personally on the loan?

The director pays nothing personally on a loan that stays small, but larger balances bring a benefit in kind and reporting. GOV.UK says a shareholder-director who owes more than ten thousand pounds at any time in the year must be treated as receiving a benefit in kind.

The benefit is measured against HMRC's official rate of interest. The official rates table shows 3.75% from 6 April 2026, unchanged from the year before.

CTM61505 makes clear this sits on top of the company's charge, not instead of it. The two are separate calculations on separate forms, and both can fall on the same balance in the same year.

Some loans are exempt from the benefit rules. The GOV.UK list includes a balance under ten thousand pounds throughout the tax year, and a loan account used “as long as it’s not overdrawn at any time during the tax year”.

A write-off still brings reporting and charges on both sides. The employer guidance requires it to be reported on form P11D whether or not the loan was a beneficial one, with Class 1 National Insurance deducted but no PAYE tax.

On the director's side, the GOV.UK guide adds Income Tax on the amount written off, paid through a Self Assessment return.

Money flowing the other way is simpler. GOV.UK states: “Your company does not pay Corporation Tax on money you lend it.”

Interest on such a loan is an expense for the company and income for the director. The company pays it net of basic rate Income Tax at twenty per cent and reports that tax every quarter on form CT61.

What do HMRC's pages leave unsettled?

The rate is the first thing they leave unsettled. The director's guide still shows 33.75% for current loans, while the manual and the statute's link to the dividend upper rate point to 35.75% for anything lent this tax year, and the guide does not reconcile with either.

I would follow the manual and the statute, and I would expect the guide to be corrected.

National Insurance is the second gap. The director's loan guide says a loan over ten thousand pounds needs Class 1 National Insurance, while the employer guide on beneficial loans says Class 1A, and the two pages give different answers on that point.

Residence is the third gap, and the widest one. None of these pages says how the benefit in kind and National Insurance rules apply to a director who lives and works outside the UK, and I cannot tell how HMRC would treat one without the facts of the case.

I am not sure how often HMRC uses the arrangements rule in practice either, and the manual gives no figures.

Nothing on the company side seems to change with residence. Section 455 speaks of a loan to a participator who is an individual, and I found nothing in it that turns on where that person lives.

Before the return goes in, the balance, the rate for each advance and the reporting are worth confirming with an accountant who knows the company. A tax adviser where the director lives can confirm the personal side.

What should an owner abroad check before the year end?

After a month of reading these pages, I think the director loan account rules punish neglect far more than they punish borrowing. A monthly reconciliation catches a personal payment while there is still time to repay it before the deadline. For a director abroad, a separate personal account and a company card kept for company costs do most of that work.

The deadline that matters is nine months after the year end. A balance cleared by then with real money costs nothing in s455, and the paperwork is a line on form CT600A.

Each future advance will follow the dividend upper rate again. I am no longer sure the GOV.UK guide written for directors is the page to start from, since it gives the old rate and a director reading only that page would not know the charge went up in April.