Director's loan interest and how it could reduce your tax bill

Charging interest on director’s loans can be a tax‐effective method for extracting funds from a limited company, and should be considered alongside salary, rent and dividends. When structured correctly, it can significantly boost tax efficiency.

In this article, we’ll explain how director loans work, summarise their key benefits, and share practical advice to help you plan your approach.

How director’s loans work

Charging interest on a director’s loan means the interest payment is treated as an allowable expense in the company’s accounts. This reduces the profits subject to Corporation Tax—making the payment more tax efficient than dividends, which are paid out of post-tax profits. It’s important that the interest rate is set at a commercially justifiable level, reflecting current market conditions.

Building your director’s loan account

Over time, a director’s loan account can accumulate funds from various sources—such as initial start-up capital provided by the director, personal contributions towards asset purchases or even retained dividends. If your company is profitable (or expected to be), it might be a good idea to charge interest on the outstanding balance.

With current market conditions, it’s reasonable to charge interest rates up to around 8%, as long as they are supported by relevant market data and justification.

Tax benefits comparison

One of the main benefits of charging interest on a director’s loan is the reduction in your company’s taxable profits, which can result in significant tax savings. For example, if a director withdraws £2,000 as interest instead of as dividends, they could end up with around £500 more in net income. This is because interest payments benefit from more favourable tax treatment—especially with the reduced dividend allowance of £500 for 2024/25—resulting in a higher take-home amount.

The exact benefit will depend on your company’s tax position and the director’s personal circumstances, but many find that the net advantage of interest payments is much higher than that of dividends.

Reporting interest payments to HMRC

Interest payments on director’s loans must be reported to HMRC. This has traditionally been done using form CT61, but many companies now submit these details online, in line with Making Tax Digital. The company deducts tax at source on the interest—currently at a rate of 20%—and remits this to HMRC.

Interest is typically declared by 5 April, with the tax payable by 14 July, following the end of the relevant accounting period. If a director’s loan is not repaid within the statutory timeframe, the company may face a Section 455 tax charge at 33.75% on the outstanding loan balance.

Minimum recommended interest payment

Although any interest payment can be beneficial, the administrative effort involved—such as calculating average interest and preparing the necessary HMRC submissions—means that the payment should be substantial enough to justify this work. We generally recommend an annual interest charge of at least £2,000—but the appropriate threshold will depend on your company’s size, administrative capacity and financial strategy. It’s important to discuss this with an accountant.

Professional tax planning advice

Navigating the tax implications of director’s loan accounts can be complex, with many factors influencing the ideal outcome for your company. Ask an accountant for personalised advice on your strategy; they’ll help you structure your director’s loan interest in line with current regulations and maximise tax efficiency.

If you would like advice or support structuring your director’s loans, contact us using the form below.