Many director-shareholders will have a loan account with their company. HMRC is reviewing directors’ loan accounts. Learn the tax risks, reporting duties and when to seek advice.
Why HMRC Is Focusing on Directors’ Loan Accounts
Many director-shareholders maintain a loan account with their company. HMRC is now reviewing these accounts closely. It is important to understand the tax risks, reporting responsibilities, and when to seek advice.
What Is a Directors’ Loan Account?
A directors’ loan can be:
- A formal short-term loan, or
- An informal arrangement, where a director withdraws cash for personal use or has personal expenses paid by the company.
If, at the end of the accounting period, a director has borrowed more than they have lent, the account is considered overdrawn. Overdrawn balances are usually cleared by:
- Paying a dividend
- Awarding a bonus
- Releasing or writing off the loan
HMRC campaign
HMRC has written to directors who had loans between April 2019 and April 2023 that were written off or released. These letters flag cases where taxable income may not have been reported on self-assessment tax returns.
- For 2023/24, income can be declared within the normal amendment period.
- For 2022/23 or earlier, HMRC advises using the Digital Disclosure Service.
If you are unsure, it is wise to discuss your situation before taking action.
Tax Implications of Directors’ Loans
While HMRC’s letters focus on personal tax, directors’ loans can also affect Corporation Tax and employment tax. Proper handling is essential, whether or not you receive HMRC correspondence.
Corporation Tax
- Loans to directors who are shareholders may trigger loans to participators rules.
- If a loan remains outstanding nine months and one day after the year-end, a Corporation Tax (s455) charge may apply.
- Exceptions: loans under £15,000 to full-time employees with no material company interest (less than ~5%).
Employment Tax
- Loans may be treated as a beneficial loan if:
- Interest is below the official rate (3.75% from 6 April 2025), and
- Total loan exceeds £10,000 during the tax year
- Reported via the annual P11D, with Class 1A National Insurance payable on the cash equivalent.
Writing Off the Loan
When a director’s loan is written off in a close company:
- The director is generally taxed on the loan amount as a deemed dividend, not as employment income.
- Proper formalities must be followed:
- Approval by shareholders at a general meeting
- A formal loan waiver documented by deed
- This reduces the risk of HMRC treating the write-off as earnings and applying National Insurance.
Getting Advice
The rules around directors’ loans are complex. Professional guidance can help ensure compliance and proper documentation, and prevent unexpected tax charges.
