Director’s loans: a guide for startup founders

Picture this: you’ve set up your limited company and are doing the work — you’re completing projects and sending invoices out. Then one month, a client doesn’t pay you. To cover your costs, you decide you want to move some money between your business and personal bank accounts. That’s a director’s loan.

Slow–paying clients and unexpected expenses are two common reasons founders first encounter director’s loans. 

In this guide, we’ll walk you through everything you need to know about them, including what a director’s loan is and how to set one up, what the tax implications are and the key rules you need to follow to stay in HMRC’s good books. 

In this article:

• What is a director’s loan?
• What is a director’s loan account?
• How can I take out a director’s loan?
• How much can I borrow?
• Is there interest on a director’s loan?
• Are directors’ loans taxable?
• How quickly do I need to repay?
• Can you write off a director’s loan?
• Can I pay off and take another one?
• Should I take out a director’s loan?

A director’s loan is money that you, as a company director, either borrow from or lend to your company which isn’t classed as a salary, dividend or expense repayment. 

It’s a legitimate financial tool that many founders use, but it does come with some rules.

As the director of a limited company, you are a completely separate legal entity from the company (via limited liability). That means any money you take out that isn’t your salary or a dividend is technically a loan and it needs to be recorded and repaid. 

The same applies in reverse: if you need to put your own money into the business to cover a shortfall, it also counts as a director’s loan, just in the other direction.

Good to know:  a director’s loan isn’t the same as a regular bank loan. There’s no formal application process, no external lender involved and the terms are largely set by you and your company. 

But (and this is important) HMRC does keep a close eye on director’s loans, so good record–keeping is essential.

There are plenty of situations where taking out a director’s loan makes sense. Here are a few of the most common:

• You’ve had an unexpectedly expensive month. Perhaps because you’ve had to spend more than planned on equipment or had to temporarily hire a contractor

• You’ve had a surprise tax bill, and you need to bridge a short–term personal cash gap

• Your business has a dip in revenue, and you want to inject some of your own savings to keep operations ticking over until income picks back up

• You’re waiting on a big client payment and need a short-term top-up while the invoice clears

• You want to take a lump sum from the business before your accountant has processed your dividend – essentially you’re borrowing against funds you’re already owed

Or you might lend money to your company if it’s in its early days and doesn’t yet have the cash reserves to cover its costs. This is common with startups that are pre–revenue or about to go through a growth phase.

A director’s loan account (DLA) is the record that tracks all the money going back and forth between you and your company. Every loan you take out or pay back, as well as any money you put into the business, is logged here.

Your director’s loan account can only ever be in one of two states:

• In credit: this means you’ve put more money into the company than you’ve taken out. The company owes you money

• Overdrawn: this means you’ve taken more money out than you’ve put in. You owe the company money

The DLA is a key part of your company’s accounts — it appears on your balance sheet and Companies House and HMRC will both be able to see it. 

Keeping it accurate and up to date is a legal requirement, so make sure you stay organised by logging as you go.  

Although it might seem worrying, an overdrawn director’s loan account isn’t necessarily a problem. It just means you need to repay what you owe within a specific timeframe (more on that below). But if you don’t repay it in time, or the loan amount tips over certain thresholds, costs can quickly add up. Something to be aware of. Here’s what you need to know if your DLA is overdrawn:

• You’ll need to repay the loan within nine months and one day of your company’s accounting year-end. 

Good to know: if you miss this deadline, your company will face an extra corporation tax charge of 33.75% on the outstanding amount — known as a Section 455 charge

• If the loan is over £10,000, it’s treated as a benefit in kind, which means you’ll need to report it on a P11D form and you may have to pay income tax and National Insurance on it

What is a benefit in kind? Benefits in kind are perks that employees or directors receive from their company which aren’t included in their salary or wages, like club memberships or company cars.

• If you fail to repay and the company goes into administration or liquidation with an outstanding DLA, a liquidator can pursue you personally for the debt.

It’s worth noting that the Section 455 tax is repayable once you’ve cleared the loan, but you have to wait until nine months after the end of the accounting year in which you repaid it to reclaim it. All things considered, that’s quite a long time to wait.

There’s no formal approval process for taking out a director’s loan — you don’t need to fill in an application form or speak to your bank manager. But you do need to document everything. 

Here’s what that looks like:

• Record it immediately: as soon as you take out the loan, record it straight away in your director’s loan account. Note the date, amount, and whether it’s a loan from or to the company
• Draw up a loan agreement: this might sound complicated but it’s simple: just set out the amount, the interest rate (if any), and the repayment terms in a document (Word or Google Docs is fine, just make sure you PDF it so it’s secure)
• Get approval: Make sure the company’s board formally approves the loan — even if you’re the only director.

If you’re lending money to your company rather than borrowing from it, you still need to draw up the loan agreement and record the amount, agree on any interest, and get approval.

It might feel like paperwork for paperwork’s sake, but the loan agreement protects you if there’s ever a dispute — and it makes your accountant’s life much easier come year–end.

Speaking of which: as a limited company owner, you’re legally responsible for keeping your personal and business finances separate. It’s a good idea to choose a dedicated business current account that comes with built–in accounting and expense management. It can make tracking your financial activities much easier — and items like your DLA!

There’s no cap on how much you can borrow through a director’s loan, but there are some important thresholds to be aware of. The big one is £10,000. 

If your outstanding director’s loan balance exceeds £10,000 at any point during the tax year, HMRC treats the loan as a benefit in kind. That means:

• You’ll need to report it on a P11D form
• You’ll pay Income Tax on the benefit (based on the official HMRC interest rate (more on that below)
• Your company will pay Class 1A National Insurance on it

This doesn’t mean you can’t borrow more than £10,000. It just means there are additional reporting responsibilities and potential tax costs if you do. 

It’s worth thinking carefully before you take out a large loan, and it’s always worth speaking to your accountant first for advice. 

Good to know: if you need to borrow more than £200,000 from your company, you’ll need to get shareholder approval under the Companies Act 2006. You could consider this another reason to keep things on the smaller side wherever possible. 

You and your company can choose whether to charge interest on a director’s loan — and you can even agree on a zero interest rate. Sounds good, right?

However, there’s a catch if your loan is over £10,000. If the interest rate is below HMRC’s official rate (currently 3.75% for the 2025/2026 tax year), the difference is treated as a benefit in kind.

If the company charges you interest, it’s classed as income for the company (it would normally be added to company profits and taxed). 

For most small director’s loans, the simplest approach is often to set the rate at HMRC’s official rate or higher. This avoids any benefit in kind complications and keeps your paperwork straightforward.

Long story short: it depends. 

A director’s loan isn’t automatically subject to tax, but there are situations where tax can come into play:

• If your loan is over £10,000. As mentioned, this is where the benefit in kind rules kick in, and you’ll pay income tax and National Insurance
• If the company doesn’t charge interest (or charges below HMRC’s official rate) on a loan over £10,000. The national interest benefit is taxable
• If the loan isn’t repaid within nine months of the company’s year–end. Here, the company pays the Section 455 corporation tax charge on the outstanding balance
• If the loan is written off. In this case, it’s treated as a dividend or income, and you’ll pay income tax on it

It’s worth noting that none of these scenarios are unavoidable. They’re all situations you can plan around. The key is being organised and not leaving your DLA overdrawn for longer than necessary.

The repayment terms are up to you and your company. There’s no official monthly repayment schedule. However, there is one important deadline to keep in mind: you must repay any overdrawn director’s loan within nine months and one day of the end of your company’s accounting year.

Miss that deadline and your company faces the Section 455 Corporation Tax charge of 33.75% on whatever’s outstanding.  

That’s on top of any normal corporation tax bill, so watch out, because it can add up quickly.

Here’s an example: if your company’s accounting year ends on 31 March, you have until 1 January of the following year to repay any outstanding director’s loan balance. If you owed £5,000 and missed that date, your company would owe an extra £1,687.50 to HMRC.

The Section 455 charge is repayable once you’ve cleared the loan. But you won’t see that money back until nine months after the end of the accounting year in which you made the repayment. 

It can be a frustrating wait, so if you’re able to repay promptly, it’s worth doing.

Technically, yes.

A director’s loan can be written off, but it comes with tax implications, so it’s rarely the financially savvy option.

When a director’s loan is written off (i.e. the company eliminates the debt), HMRC treats the written–off amount as income for you. 

That means:

• You’ll pay income tax on the full amount written off  (through your tax return)
• Your company will pay class 1 National Insurance on it as well
• If the company had already paid a Section 455 charge, that charge becomes repayable, but the tax savings from a write–off don’t usually outweigh the costs

Writing off a director’s loan might feel like a smart solution. But in reality, the tax bill often makes it more expensive than simply repaying the loan.

It’s always a good idea to talk to your accountant or another financial professional before going down this route.

Yes. But watch out for a practice known as bed and breakfasting (a strange term, let us explain).

Bed and breakfasting is where a director repays their loan just before the nine–month deadline (to avoid the Section 455 charge), only to take out a new loan of a similar amount straight afterwards.

HMRC is wise to this. If you repay a loan and then take out another loan of £5,000 or more within 30 days, the anti-avoidance rules kick in, and the Section 455 charge applies despite the repayment.

More specifically, the rules state that if the total of new loans taken out within 30 days of a repayment is £5,000 or more, the repayment is matched against those new loans first. This means your old loan is treated as still being outstanding for Section 455 purposes. 

Our take on this: repaying and immediately reborrowing is not a financially savvy or safe workaround. Generally, HMRC are familiar with these practices, and it’s fairly easy for them to spot. The penalties aren’t worth it.

Like most things in business, the answer is: it depends on your circumstances. 

A director’s loan can be a useful tool when used wisely. But it can also be a source of stress if it’s not managed carefully. 

Here’s a quick summary of the pros and cons to help you decide:

Flexibility: you set the terms, repayment schedule, and interest rate (within HMRC’s rules, of course)
No external approval needed: unlike a bank loan, there’s no credit check or application process to take out a director’s loan
Can be interest–free: for loans under £10,000, you can charge zero interest without triggering any benefit–in–kind charges
Useful for short–term cash flow: it’s a practical way to bridge a personal cash gap without permanently taking money from the company

Tax risks if not repaid on time: the Section 455 charge can be a nasty surprise if you miss the nine-month deadline
Benefit-in-kind complications for loans over £10,000: this adds reporting obligations and can trigger income tax and National Insurance charges
Can complicate your company’s accounts: a large or poorly managed DLA can make your balance sheet look untidy and may raise red flags with lenders or investors
You’re personally liable: if the company goes under with an outstanding loan on the DLA, you can be pursued for repayment

Managing a director’s loan account might sound a bit stressful. But as long as you keep accurate records from the start and stay on top of your deadlines, you should find it very manageable. 

Problems can arise when founders lose track of what they’ve borrowed, forget about the nine–month repayment rule, or make mistakes in their documentation.

We can help with that. Our smart business current account with built–in bookkeeping tools makes it much easier to track the money moving between you and your company, so nothing slips through the cracks.

Also, if you haven’t set up your limited company yet, you can get started quickly with Countingup’s easy company registration service. If you’re ready to get registered, you can first check if your preferred company name is available by using our company name availability checker. 

If you’re after more small business finance guidance, head over to our resource hub, where you can find more information to help start, run and grow your business. Best of luck!

A director’s loan is one of the simplest ways to borrow from or lend to your own limited company. There’s no official application process. You just record the loan in your director’s loan account, set out the terms in a simple loan agreement, and make sure it’s approved in your board minutes. 

How do I pay myself from a limited company?

It’s important to note that a director’s loan isn’t the same as paying yourself. There are three main ways to extract money from your limited company: salary (through PAYE), dividends (paid from company profits), and expenses reimbursement. A director’s loan is separate from all of these — it’s money you borrow from the company that must be repaid. 

What is director’s remuneration?

Director’s remuneration refers to the total package of pay that a company director receives for their role. This includes salary, bonuses, and any benefits in kind (like a company car or private health insurance). It’s separate from dividends, which are a share of the company’s profits, and from director’s loans, which are repayable borrowings rather than earnings.