Borrowing from your business – The hidden tax risks of director’s loans

Taking money from your company in the form of a director’s loan might seem like a convenient option, but if mismanaged, it can lead to unexpected tax charges.  

With HM Revenue & Customs (HMRC) increasing the official interest rate on beneficial loans from 2.25 per cent to 3.75 per cent from April 2025, directors must be cautious to avoid unnecessary costs. 

What counts as a director’s loan? 

A director’s loan is any money taken from the company that is not classified as salary, dividends, or expense reimbursements.  

While this can be a flexible financial solution, it comes with strict tax rules. 

Failing to repay on time 

Loans must be repaid within nine months and one day after the end of the company’s accounting period.  

If not, the company faces a Section 455 tax charge of 33.75 per cent on the outstanding balance. 

How to avoid it: 

• Ensure the loan is repaid before the deadline. 

• Consider repaying through dividends or salary – but be aware of the additional tax implications. 

Interest-free loans and the Benefit in Kind trap 

If a director borrows money at an interest rate below HMRC’s official rate (rising to 3.75 per cent in April 2025), the difference is considered a Benefit in Kind (BIK). This means: 

• The director is taxed on the benefit. 

• The company must pay Class 1A NICs on the loan. 

How to avoid it: 

• Charge interest at HMRC’s official rate or higher. 

• Ensure all loans are reported correctly in payroll and benefit submissions. 

Writing off loans  

If a company writes off a director’s loan, it is treated as income for tax purposes. This means: 

• The director is taxed as if they received a salary or dividend. 

• The company may also face additional tax liabilities. 

How to avoid it: 

• Explore alternative repayment options before considering a loan write-off. 

• Seek professional advice to determine the most tax-efficient way to handle outstanding loans. 

The impact of rising interest rates 

With the interest rate on beneficial loans increasing in 2025, director’s loans are becoming a more expensive borrowing option.  

The rate for precise method calculations will rise to 3.75 per cent, while the averaging method remains at 2.25 per cent (subject to change). 

How to reduce costs: 

• Opt for the averaging method if it remains at a lower rate. 

• Compare the cost of a director’s loan with other borrowing options. 

With rising interest rates and strict repayment rules, it is crucial to manage these loans carefully.  

If you need guidance on staying compliant, our team of tax experts can help you make the right decisions. Contact us today.