Tax charges on loans to directors are rising, so now is a good time to review any director’s loan account balances. In particular, director’s loan repayment timing can make the difference between a clean year end and an unexpected bill.
The tax charge that applies when a director, who is also a participator, has an outstanding loan with a close company is going up by two percentage points to 35.75% from 6 April 2026.
Very broadly, a participator is a shareholder in the company. In addition, a close company is one controlled by five or fewer participators.
Overdrawn loan account
Loans between a director and their company are fairly common. There are various reasons why a director’s loan account can end up overdrawn.
An overdrawn director’s loan account will normally be cleared by voting the director a dividend or bonus. However, there are situations where this is not done.
This could be because the tax implications are prohibitive for a particular tax year. Alternatively, it could be because the company does not have sufficient profits available to pay a dividend.
When the tax charge applies
The tax charge is payable when an outstanding loan is not repaid within nine months and a day of the end of the company’s accounting period.
This is why director’s loan repayment planning matters. It is often the timing that catches people out.
Example: how the timing works
On 15 April 2026, a director withdraws £150,000 from their personal company to help fund a private property purchase. The company has an accounting date of 31 March.
The loan falls in the company’s year ending 31 March 2027. So, there will be no tax charge if it is repaid by 1 January 2028.
By careful timing, the director can make use of company funds for over 20 months. The only tax is what is charged on the director for having a beneficial loan.
If not repaid by 1 January 2028, the company will have to pay a tax charge of £53,625. That is £150,000 at 35.75%. This will be due along with its corporation tax liability.
If the loan is repaid later
The tax charge will be refunded by HMRC if, after 1 January 2028, the loan is repaid or written off.
HMRC’s basic guidance on loans to director can be found here.