Can Directors Lend Money to Their Limited Company?
When Might Your Limited Company Need a Loan?
Hey there! Let’s make your next financial decision a little easier. As a UK contractor running a limited company, you might encounter situations where your business needs an extra cash injection. Here are some common scenarios:
Start-up capital: Providing the initial funding for a new company, possibly alongside fellow directors.
Bridging cash flow gaps: Covering expenses while waiting for client payments.
Purchasing assets: Buying equipment or other assets when company reserves are low.
Covering trading losses: Injecting working capital during a difficult period.
Avoiding outside investors: Preventing dilution of your ownership by self-funding instead of seeking external investment.
Are Directors Allowed to Lend Money to Their Company?
Absolutely. UK company law permits directors to lend money to their own companies. In fact, sourcing funds this way can be simpler and more flexible than approaching a bank or outside lender.
For good governance and to protect everyone’s interests, it’s best practice to:
Draw up a formal loan agreement. This should detail the loan amount, repayment terms, interest rate (if any), and other conditions.
Check your company’s Articles of Association to ensure there are no restrictions on director loans (unlikely with standard documents, but always worth verifying).
Record board approval, even if you’re a sole director, by noting the decision in board minutes.
“A clear paper trail acts as your safety net if questions arise later.”
All director loans, both to and from the company, are recorded in the company’s Directors’ Loan Account within your accounting records.
Can You Charge Interest on the Loan?
Yes, you can charge interest on money you lend your limited company. This is treated as an unsecured commercial loan. However, here are some important considerations:
Interest is optional. You’re not obliged to charge interest, but you can if you wish.
Set a fair rate. Charging excessive interest could stress company cash flow and is not advisable for fledgling businesses. Consider current market rates for unsecured loans as a benchmark.
Flexible repayment terms. Longer repayment periods may be preferable for new companies with uncertain income.
How Are Interest Payments Treated for Tax?
Interest paid by your company on a director’s loan is tax-deductible—just like interest on a bank loan. This means the company can subtract these payments from its profits before calculating Corporation Tax.
However, tax rules require a few extra steps:
The company must deduct 20% Income Tax from interest payments made to you (the director).
This tax must be reported and paid to HMRC every quarter using form CT61.
Here’s how it works in practice:
| Interest Paid | You Receive | HMRC Receives |
|---|---|---|
| £100 | £80 | £20 |
If you’re a basic rate taxpayer, no further tax is due on the interest. However, you must declare the interest received on your annual Self Assessment tax return.
Key reminders:
Interest payments reduce the company’s taxable profits.
Failure to report and pay the tax on time can result in penalties and late payment interest.
Other Key Points When Lending to Your Company
Let’s cover a few crucial best practices and risks:
Balance sheet: Your director’s loan is shown as a creditor (liability) on the company’s balance sheet.
Repayments: The company can repay your loan at any time, provided it has sufficient funds to meet existing obligations (like tax bills).
No tax on capital repayment: Repayment of the loan principal is not taxable income for you; it’s just your money returned.
Interest is taxable: Only the interest you receive is taxable, as outlined above.
Insolvency risk: If the company becomes insolvent, you may lose your money unless you have secured creditor status (which is rare for director loans).
Act in the company’s best interests: As a director, you must always act in the best interests of the company—not just yourself.
Best Practice Checklist
Here’s a summary to keep your company and yourself protected:
Draft a written loan agreement.
Record board approval (even if you’re the sole director).
Set fair and realistic interest and repayment terms.
Ensure the company can repay the loan without jeopardising its obligations.
Deduct and pay Income Tax on interest to HMRC via CT61.
Include all interest received on your Self Assessment tax return.
Seek advice from your accountant if you’re unsure at any stage.
Next Steps
Review your company’s Articles of Association for any restrictions.
Speak to your accountant before lending or borrowing between yourself and your company.
Keep detailed records of all loans, repayments, and interest payments for both company and personal tax purposes.
If you’re in doubt, professional advice is your best tool for peace of mind and compliance.
