A Guide to the UK Director’s Loan Interest Rate [Explained]

The director's loan interest rate is the minimum rate HMRC expects you to charge yourself when you borrow money from your own company. 

Fall below it, and the shortfall counts as a personal benefit you'll pay tax on. Your company may also face a separate charge if the loan isn't repaid in time.

Here's how the official rate works, when it applies, and how to avoid paying more tax than you need to.

Key points

• The £10,000 threshold is the key trigger 📈
  If your outstanding loan balance goes above £10,000 and you aren't paying interest at HMRC's official rate, you could face a benefit in kind charge. Your company may also have reporting and National Insurance obligations.
• Repaying the loan on time can save your company tax ⏳
  An overdrawn director's loan that's still outstanding nine months and one day after your company's accounting period ends can trigger a Section 455 tax charge. Repaying or clearing the balance before then can help you avoid it.
• Accurate record-keeping makes all the difference 📋
  Having an up-to-date record of every withdrawal and repayment makes it much easier to calculate your loan balance, meet HMRC's reporting requirements, and avoid unexpected tax bills.
• ANNA helps you stay on top of director's loans 🚀
  ANNA automatically categorises transactions, keeps your records organised, gives you a real-time view of your business finances, and helps you stay ahead of important tax deadlines, making director's loans simpler to manage.

What counts as a director's loan

A director's loan is any money you take from your company that isn't salary, dividends, or a reimbursed business expense. These loans can range from a large one-off withdrawal to small amounts that add up over time. 

Many company directors use director's loans as a flexible way to access money when dividends aren't available, perhaps because the company doesn't have enough retained profits or because the timing doesn't suit a formal dividend declaration. 

That's perfectly acceptable, provided the loan is properly recorded and repaid when required. Problems usually arise when an overdrawn loan remains unpaid for too long or grows too large without proper management. 

How does a director’s loan account work?

A director's loan account records everything you borrow from the company and everything you pay into it. 

The balance can go either way. If you've put more money into the business than you've taken out, you're in credit, and the company owes you. However, when the balance flips the other way, and you owe the company, you have an overdrawn director's loan account.

An overdrawn director's loan account isn't automatically a problem, but it may trigger additional tax rules. These depend on how much you've borrowed, whether you're paying interest, and how long the loan remains unpaid. 

What can a director's loan be used for?

Unlike many business loans, a director's loan isn't restricted to business spending. Once the company lends you the money, you can use it for personal purposes, whether that's paying household bills, buying a car, or covering a temporary cash shortfall.

However, every withdrawal should still be properly recorded in the company's accounting records. Treating company money as personal spending without recording it as a loan, salary, or dividend can create accounting errors and raise red flags with HMRC if your records are reviewed.

When does the director's loan interest rate apply?

The director’s loan interest only becomes relevant if your outstanding loan balance exceeds £10,000 at any point during the tax year. 

Above that threshold, HMRC treats the loan as a beneficial loan unless you're paying interest at least equal to its official rate of interest, which is 3.75% in the 2026/2027 tax year.

If you're paying less than the official rate, or no interest at all, HMRC treats the difference as a benefit in kind. You'll pay Income Tax on that benefit through your Self Assessment tax return, while your company must report it on form P11D and pay Class 1A National Insurance, currently charged at 15%.

For example, if you borrow £20,000 interest-free for an entire tax year, HMRC counts that as a taxable benefit worth £750 (3.75% of £20,000). You pay Income Tax on that amount, while your company pays Class 1A National Insurance on the same benefit.

If your outstanding balance never exceeds £10,000, these rules don't apply. However, a separate charge, known as Section 455, can still apply if the loan isn't repaid in time.

🧠 Good to know

Since April 2025, the official interest rate is no longer fixed for the entire tax year. HMRC can now review and update it every quarter. 

If the rate changes while your loan is outstanding, the benefit calculation may need to be split across each period using the different official rates.

What happens if you don't repay the loan?

If your director's loan remains unpaid for nine months and one day after the end of the company's accounting period, your company may also have to pay an additional Corporation Tax charge under Section 455 of the Corporation Tax Act 2010.

The tax is charged at the dividend upper rate. The rate is 33.75% for loans made before 6 April 2026, and 35.75% for loans made on or after 6 April 2026.

Unlike Corporation Tax, this is a temporary charge. Once the loan has been repaid, or cleared through a dividend or bonus, the company can reclaim the Section 455 tax. 

However, HMRC won't issue the repayment until nine months after the end of the accounting period in which the loan was cleared, so you'll need to factor that delay into your cash forecasting.

If several directors have overdrawn loan accounts, HMRC calculates Section 455 separately for each one. One director's credit can't offset another director's overdrawn balance.

Anti-avoidance rules for director’s loans

HMRC has rules designed to prevent directors from temporarily repaying loans to avoid the Section 455 charge, only to borrow the money again shortly afterwards.

If you repay £5,000 or more and take a new loan of £5,000 or more within 30 days, the repayment may be disregarded for tax purposes, whether or not you meant to avoid the charge. A separate rule can apply where the balance is £15,000 or more, and the facts show you intended to borrow again when you made the repayment.

How can you avoid extra tax?

The simplest way to avoid Section 455 is to repay the loan before the nine-month deadline.

A dividend can be a practical option if the company has sufficient distributable profits. A bonus is another possibility, although it will usually create PAYE and National Insurance bills, so it’s less tax-efficient than a dividend in many situations.

If you expect the loan to remain outstanding for longer, charging interest at or above HMRC's official rate can prevent a benefit in kind charge. However, this doesn’t remove the potential Section 455 charge if you don’t pay the loan by the relevant deadline.

The right option depends on the company's profits, your personal tax position, the size of the loan, and the timing of the repayment.

Whichever approach you take, keep clear records of every withdrawal and repayment. Proper record-keeping makes it much easier to calculate your loan balance, prepare and file your company accounts, and deal with any questions from HMRC.

Reporting director's loans

If your director's loan creates a benefit in kind, your company must report it on form P11D, which is due by 6 July following the end of the tax year.

You have to pay any Class 1A National Insurance due by 22 July if you pay electronically. You also have to include the benefit in your personal tax calculations, so it may affect the amount of Income Tax you owe through Self Assessment.

Keep track of director's loans with ANNA

Director's loans are much easier to manage when you always know your current balance. ANNA helps you stay on top of company finances, allowing you to spot potential tax issues before they become expensive.

Here’s how ANNA helps:

• Auto Accountant: It automatically categorises transactions and makes it easier to identify money moving between you and your company
• A real-time view of your business finances: You can check your balance whenever you need to, rather than waiting until your end-of-year accounts are prepared
• Automatic receipt capture: ANNA’s Receipt Scanner keeps your records organised, so business expenses don't accidentally get mixed up with director's loan withdrawals
• A dedicated business account: Your ANNA account keeps company spending separate from your personal finances from the start, so you won't have to reclassify personal transactions as director's loans later
• Automatic invoice and expense matching: The built-in invoicing software keeps your accounts clean and consistent, helping you see your true director's loan position at a glance
• Shareable, accurate records: You can share access with your accountant, so they can reconcile transactions and prepare your yearly accounts without chasing you for information
• 24/7 customer support: A professional team of support agents is there if you have any questions, any time of day or night

Sign up with ANNA today to take the stress out of managing your financial admin and director's loans.