Is a director allowed to lend money to their limited company
Yes, a director is absolutely allowed to lend money to their limited company. In fact, it’s a common and often practical way to inject capital when the business needs a cash injection but the director doesn’t want to increase their shareholding or go through the formality of a formal capital injection. However, there are important rules you need to follow to stay compliant with Companies House, HMRC and the law. Let’s explore what you need to know.
What the law says about director loans
The Companies Act 2006 permits directors to lend money to their limited company, but it’s heavily regulated. The key restriction is found in section 197 of the Act: a company cannot make a loan to a director unless the loan is approved by members in advance (via general meeting) or falls within specific exemptions. However, this rule works in reverse – a director lending to their company is treated differently and is generally permitted without prior approval.
That said, you must still comply with several important requirements. The loan must be documented properly, recorded in the company accounts, and disclosed to HMRC where necessary. Treating it informally – simply moving money into the business bank account without paperwork – is a mistake that could cause problems later.
Recording the loan properly
From an accounting perspective, director loans are recorded as a current liability on the balance sheet. You’ll need to create a loan agreement (or at minimum, detailed records) that sets out:
- The amount lent
- The date of the loan
- Whether interest is being charged
- The repayment terms (if any)
- The names of all parties involved
This documentation is essential. If HMRC challenges you, or if you need to evidence the arrangement in future (perhaps during a company sale or dispute resolution), contemporaneous written evidence is invaluable. You don’t need a formal solicitor-drafted document – a simple letter confirming the terms, signed and dated, is sufficient.
From a tax perspective, director loans must also be recorded in your company’s tax computations and shown separately on your accounts when submitted to Companies House.
The Corporation Tax and Personal Tax implications
Here’s where it gets more interesting from a tax standpoint. If your director loan carries no interest, HMRC may view the benefit as a taxable benefit-in-kind. However, if you charge a commercial rate of interest, the company can claim a deduction against Corporation Tax (currently 25% for profits over £250,000, or 19% for smaller profits in 2024/25).
The director paying the interest will owe income tax on that interest received – though in most cases, the company will deduct basic rate tax at source.
More importantly, if the loan is written off later, HMRC will treat the write-off as a distribution of profits. This can trigger income tax and potentially dividend tax on the director’s personal tax return. If the amount is substantial, you could face a significant tax bill. Similarly, if you simply withdraw money from the business without formally recording it as a loan repayment, HMRC may assess it as wages (subject to National Insurance) or dividends.
Avoiding the director loan account trap
One critical point: if your director loan account drifts into debit (meaning the director owes the company money), HMRC takes this seriously under the loan-to-participators rules. If a director or shareholder has borrowed money from the company and hasn’t repaid it within nine months of the company’s year-end, the company faces a Corporation Tax charge of 32.5% on the outstanding balance. This is a punitive tax, not a permanent liability, but it’s triggered annually until the loan is repaid.
To avoid this, ensure loans are either repaid promptly or formalised with clear repayment terms. If repayment within nine months isn’t possible, discuss this with your accountant – there may be tax-efficient alternatives, such as converting the loan to equity.
When to seek professional guidance
Director loans can become complicated if you’re running multiple loan accounts, if loans bridge several accounting periods, or if the amounts are substantial. Tax planning around director loans – for instance, structuring them to minimise Corporation Tax whilst managing personal tax efficiently – is definitely worth a conversation with your accountant.
The good news is that properly documented director loans are a perfectly legitimate way to support your business. The key is keeping meticulous records and staying ahead of the tax compliance calendar.
For tailored advice, contact Severn Accounting – we’re here to help.