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What are the risks with directors’ loans?
13 January 2025
A director’s loan is money taken out of a company by a director that is not a salary, dividend, expense reimbursement or money that has previously been paid into or loaned to the company.
A record of money borrowed or paid into the company must be kept – usually known as a director’s loan account – and this money must be repaid to the company or properly accounted for within a set timeframe.
Misusing directors’ loans can lead to financial penalties, breach of fiduciary duties, legal issues, and unwanted scrutiny from HM Revenue & Customs (HMRC).
If you have used a director’s loan, here is what you need to watch out for:
- Section 455 tax charges – If loans are not repaid within nine months of the financial year-end, your company faces a tax charge of 33.75 per cent on the outstanding balance.
- Personal tax implications – Unrepaid or forgiven loans may be treated as personal income, resulting in additional Income Tax and National Insurance (NI) liabilities.
- Benefit in Kind (BIK) – Loans exceeding £10,000 or offered at below-market interest rates may trigger taxation linked to Benefit in Kind (BIK). Therefore, the company must submit the P11D to HMRC and give a copy to the director.
- Administrative penalties – Failing to record or report loans accurately in your accounts or tax returns could result in fines and further investigation.
In addition to fines, consistently overdrawn accounts or mismanagement can tarnish your company’s financial credibility, especially if it draws additional HMRC scrutiny.
Remember, acting against the interests of your company may also constitute a breach of your fiduciary duties as a director.
If this is the case, the company is entitled to seek equitable compensation from any director whose breach of these duties results in a loss.
How to stay compliant
To stay compliant, you must maintain clear records and follow the rules associated with directors’ loans.
If you are unsure how to handle directors’ loans effectively, it is best to seek professional advice.
Need help managing your directors’ loans? Get in touch with our expert advisers.
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