Why Borrowing from Your Company Could Cost More Than You Think

For many business owners, taking a loan from their company can appear to be a convenient and tax-efficient way to access funds — especially when bank interest rates are high. However, director’s loans are often more expensive than they first appear.

While borrowing from your company may offer short-term financial flexibility, it can also create unexpected tax charges for both the company and the director if not managed carefully.

Here’s what every director should know before taking money from their business.

What Is a Director’s Loan?

A director’s loan happens when a company director takes money from the business that is not:

• Salary
• Dividends
• Expense reimbursements
• Business-related payments

Essentially, the company is lending money directly to the director.

Although this may seem straightforward, HMRC applies strict tax rules to prevent directors from using company funds indefinitely without paying tax.

The Company Tax Charge Explained

If the director does not repay the loan within nine months and one day after the company’s accounting year-end, the company may face an additional tax charge under Section 455 (s455).

Currently, this charge is:

35.75% of the outstanding loan balance

The purpose of this rule is to stop directors from avoiding dividend tax or income tax by continuously borrowing money from the company.

Is the Tax Permanent?

No. The charge is technically temporary because HMRC refunds it once the loan is repaid or written off.

However, there is a catch.

The repayment is often delayed until after the next corporation tax period, meaning the company could suffer significant cash flow pressure while waiting for the refund.

For some businesses, this temporary tax cost can still create serious financial strain.

When the Director Faces a Personal Tax Charge

Even if the company repays the s455 tax later, the director may still face a separate personal tax issue.

If the loan balance exceeds £10,000 at any point during the tax year, HMRC may treat it as a “beneficial loan.”

This means the director received a financial benefit by borrowing money interest-free or at a lower-than-market interest rate.

HMRC currently uses an official interest rate of:

3.75%

The director may then pay income tax on the difference between:

• The interest actually paid
• HMRC’s official rate

At the same time, the company must also pay:

15%

Class 1A National Insurance on the taxable benefit.

How to Avoid the Benefit-in-Kind Charge

One practical solution is for the company to charge interest on the loan at HMRC’s official rate or higher.

Doing this can help avoid:

• Benefit-in-kind tax charges
• Employer’s National Insurance contributions

In some cases, borrowing from the company at the official rate may still be cheaper than using:

• Personal loans
• Credit cards
• Overdraft facilities

However, proper documentation and accounting treatment are essential.

The Real Cost of Clearing the Loan

Many directors assume they can simply repay the loan later using company profits. In reality, repayment often comes from:

• Personal savings
• Declaring dividends
• Paying bonuses
• External borrowing

The most common approach is declaring a dividend to clear the director’s loan account.

But dividends are still taxable.

As a result, what initially looked like a “tax-free loan” may simply become delayed taxation instead.

Which Option Is More Tax Efficient?

The answer depends largely on the director’s tax band.

Basic Rate Taxpayers

For basic rate taxpayers, declaring a dividend may often be cheaper than leaving the company to suffer the 35.75% s455 charge.

Higher Rate Taxpayers

For higher rate taxpayers, the outcome is usually similar either way.

Additional Rate Taxpayers

In some cases, additional rate taxpayers may find it more beneficial for the company to temporarily pay the s455 charge, since it can eventually be reclaimed.

Careful tax planning is essential before making this decision.

Using Personal Borrowing to Repay the Loan

Some directors repay company loans using:

• Personal bank loans
• 0% credit cards
• Refinancing arrangements

While this strategy can work, it carries risks.

0% credit card offers are temporary, and personal borrowing may create additional interest costs that outweigh any tax savings.

Professional advice is recommended before taking this route.

When Does Borrowing from Your Company Make Sense?

Director’s loans are usually most effective for:

• Short-term borrowing
• Temporary cash flow needs
• Situations where repayment will happen quickly

For example, a director may borrow funds shortly before a dividend is declared and repay the balance soon after year-end.

However, using director’s loans as a long-term financing strategy is rarely tax efficient.

Final Thoughts

Borrowing from your company may seem attractive, especially during periods of high interest rates. But director’s loans come with complex tax rules that can create unexpected costs for both the company and the individual.

Before taking money from your business, it is important to understand:

• s455 tax charges
• Benefit-in-kind rules
• Dividend tax implications
• Cash flow risks
• Repayment planning

With proper planning, director’s loans can still be useful for short-term funding — but without a clear repayment strategy, they can quickly become an expensive mistake.

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