Starting a new business? Get 40% off our accountancy services for 3 months! 😎

x

As a sole trader you can keep any profits you earn after paying tax and National Insurance. The way that you move personal money in or out is a bit different for a limited company, because it’s a separate legal entity from its shareholders and directors. If a director loans their own money to the business, they may be able to charge interest on the amount that they’re owed, depending on the circumstances.
 

What is a director’s loan?

Do I pay any tax if I charge my company interest on a director’s loan?

Showing a director’s loan in the company’s financial records

Director’s loans and Corporation Tax

If a company director takes money out of the company which they haven’t contributed, and the money isn’t a dividend or salary, it’s normally classed as a director’s loan. You’ll need to keep a record of these transactions known as a director’s loan account, with a separate account for each director.

The director’s loan account will also show any personal money that you lend to the business, so the account may be in credit or debit at any time.

Our Guide to Director’s Loans goes into more detail on the basics!

Charging interest on director’s loans

As a company director you may charge your company interest on the loan. This is usually at a similar rate to a commercial rate of interest, but this will depend on the amount and any risk attached.

Charging interest on any loan you make to your company effectively means you’re making money on it. Because this is a type of income, the company must deduct the basic rate of income tax (20%) from the interest amount before paying it to you. The interest which you charge to your limited company also counts as a business expense.

You’ll need to tell HMRC about the interest payment you receive, and your company must report the income tax which it deducts.

 

Limited company accountancy services

From only £54.50 per month

Learn more

In practice, a director’s loan account might be shown just as a book-keeping entry. It could also be a theoretical current account, or a loan account.

If your director’s loan account is in credit, you’re effectively giving your company a loan because the company doesn’t simply ‘keep’ the money. You can withdraw that credit at any time by taking the balance back from the business, without needing to enter it on the Company Tax Return.

The rate is 32.5%, (or 25% if the loan was made before 6 April 2016*). The company can reclaim any Corporation Tax it’s paid on the loan once it’s fully repaid.

Talk to one of the team about our online accounting services for your limited company. Call 020 3355 4047, ask for a call back, and get an instant online quote.

About The Author

Elizabeth Hughes

A content writer specialising in business, finance, software, and beyond. I'm a wordsmith with a penchant for puns and making complex subjects accessible. Learn more about Elizabeth.

More posts by this author
Subscribe
Notify of
guest
2 Comments
Oldest
Newest Most Voted
Inline Feedbacks
View all comments
Vinod Patel
Vinod Patel
13th December 2021 6:45 pm

If you borrow on a property and let it to your company then the company pays you interest. This interest is deductable in the company. However, how would the director show it on his tax return. Would it be interest received and then a corresponing interest paid. So nil profit.

Read more posts...

What is a Non-Established Taxable Person for VAT?

There are special VAT rules in place for online sellers who are classed as non-established taxable persons (NETPs), and use an online…

Read More

The Accountancy Partnership – Our Positive Reviews

Here at The Accountancy Partnership, we’re proud of our customer reviews The reviews we receive from our customers show how hard we…

Read More

What Type of Legal Structure Should I Choose When I Start a Business?

The structure that you choose when you start a business affects how the business operates, the amount of tax you pay, how…

Read More
Back to Blog...

Confirm Transactions

The number of monthly transactions you have entered based on your turnover seem high. A transaction is one bookkeeping entry such as a sale, purchase, payment or receipt. Are you sure this is correct?

Yes, submit my quote
No, let me change it

Please contact our sales team if you’re unsure

VAT Returns

It is unlikely you will need this service, unless you are voluntarily registered for VAT.

Are you sure this is correct?

Yes, the business is VAT registered
No, let me change it

Call us on 020 3355 4047 if you’re not sure.

Bookkeeping

You will receive our bookkeeping software Pandle for free, as part of your package.

You can use this to complete your own bookkeeping, or we can provide a quote to complete your bookkeeping for you.

Please select and option below:

I will do my own bookkeeping
I want you to do my bookkeeping

Call us on 020 3355 4047 if you’re not sure.