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Published: February 2026 | by Admin
A director’s loan can be a useful way to manage short-term cash flow, but it can also create unexpected tax liabilities if not handled correctly. In the UK, HM Revenue & Customs has strict rules on how directors’ loans are taxed. Understanding these rules is essential to avoid penalties, additional tax charges, and compliance issues.
In this guide, we explain how the tax on a director’s loan works, when tax becomes payable, and how company directors can stay compliant.
A director’s loan is simply money taken out of a company by a director that isn’t salary, dividends, or a legitimate expense repayment. This often happens without much thought, especially in small businesses, but it’s important to understand how these loans work because they come with specific tax rules.
Not every director’s loan is taxed straight away, which is where confusion often starts. Whether tax applies depends on factors like how much is borrowed, how long the loan remains unpaid, and whether interest is charged. Understanding these conditions early can help you avoid unexpected tax bills.
When people talk about the tax on a director’s loan, they’re usually referring to more than one type of tax. In practice, a loan can affect both the company and the director personally, depending on how it’s handled. The key is knowing which taxes apply and when.
Section 455 tax applies if a director’s loan isn’t repaid within a set time after the company’s year-end. This charge is aimed at stopping directors from using company money as long-term, interest-free borrowing. Although it’s paid by the company, it’s directly linked to the director’s loan balance.
Even if a loan is eventually repaid, it can still create a personal tax issue for the director. If the loan is large or interest isn’t charged, HMRC may treat it as a benefit in kind. This means the director is effectively being taxed on the benefit of borrowing money cheaply or interest-free.
Repayment deadlines play a crucial role in how director’s loans are taxed. While taking money from a company is allowed, HM Revenue & Customs sets clear rules to prevent directors from using company funds as long-term, interest-free borrowing.
The most important rule to understand is the nine months and one day deadline. If a director’s loan is not fully repaid within nine months and one day after the end of the company’s accounting period, the company becomes liable to pay Section 455 tax on the outstanding balance.
This applies regardless of when the loan was taken during the year, and even a small unpaid balance can trigger the tax charge.
A common source of confusion is assuming the repayment deadline is linked to the personal tax year. In reality, the deadline is based on the company’s accounting year-end, not the director’s self-assessment period.
If the company has an unusual year-end, directors may have less time than expected to repay the loan, making early planning essential.
Simply repaying the loan just before the deadline and then taking the money back out shortly afterwards can still cause problems. HMRC has anti-avoidance rules designed to stop this type of behaviour.
If a loan is repaid and then re-borrowed within a short period, HMRC may treat the loan as if it was never repaid for tax purposes, meaning Section 455 tax could still apply.
Repaying a director’s loan on time can prevent Section 455 tax, but it does not always remove all tax implications. If the loan exceeded £10,000 at any point during the tax year and was interest-free or charged at a low rate, benefit in kind tax may still apply to the director, even if the loan is later repaid.
In many cases, there is no immediate personal tax. However, personal tax can apply if the loan is large, interest-free, or written off. Knowing when this happens helps directors avoid surprises.
If a loan remains unpaid beyond the allowed deadline, it can lead to additional taxes for the company and, in some cases, the director. It can also increase the chances of HMRC taking a closer look at the company’s finances.
A director’s loan can be written off, but this is not tax-free. When a loan is written off, it’s usually treated as income for the director, which means personal tax may become payable.
Director’s loans can be useful, especially for managing short-term cash flow, but they need to be handled carefully. By understanding the rules, keeping good records, and planning ahead, directors can use loans responsibly without running into unnecessary tax issues.