If you run a Limited Company in the UK and take money out from your company that isn’t a salary, dividend, or reimbursed expense, you’ve taken out a director’s loan. 

Understanding what director’s loans are and the director’s loan interest rate set by HMRC is key if you want to avoid those pesky penalties. Getting it wrong can lead to unexpected tax liabilities and reporting issues, which can affect not only you, but also your business.

What is a director’s loan?

Simply put, a director’s loan is money borrowed from or lent to your company that is not part of your normal pay or dividends. These loans should be recorded in the company’s accounts under a “director’s loan account” rather than as profit or loss.

New to running a business or getting to grips with your duties as a director? Our ultimate guide breaks down directors’ loan accounts and highlights the essential do’s and don’ts.

The key rules to directors’ loans

While director’s loans can be common in small, owner-managed businesses.

There are a few key rules you should know.

1. Loans over £10,000 at any point in the tax year are treated as a Benefit in Kind and must be recorded at the end of the tax year on a P11D. This will be liable to both personal and company tax.
2. Proper accounting is essential. Failing to record director’s loans properly can result in HMRC reclassifying withdrawals as taxable income. 
3. Withdrawing a director’s loan above £10k without shareholder pre-approval is often treated as illegal. 

The rules applying to director’s loans are not limited to the ones mentioned above, if you’re wondering about the full tax implications of a director’s loan account, we recommend checking out this guide. 

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HMRC’s official director’s loan interest rate

HMRC sets an Official Rate of Interest (ORI) for directors’ loans. This applies when a loan is either interest-free or charged below the official rate. It ensures any personal benefit from borrowing is taxed fairly.

Why does HMRC do this?

The ORI exists to make sure loans from a company to its directors are taxed fairly. Without it, directors could borrow money cheaply or interest-free and effectively receive money without paying tax. 

By setting a standard official HMRC director’s loan interest rate, they can identify any financial advantage a director might receive. They can then make sure it is treated as a Benefit in Kind if it falls below the official level.

How does this impact directors?

If a director’s loan exceeds £10,000 and the interest charged is below the ORI, HMRC treats the shortfall as a taxable benefit. This means:

• The company must report it on a P11D form.
• The director may pay personal tax on the benefit via Self Assessment.
• The company may pay Class 1A National Insurance contributions on the value of the benefit. 
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What is the current HMRC official director’s loan interest rate?

For the 2025/26 tax year, the HMRC director’s loan interest rate is 3.75%. HMRC has signalled that the rate is expected to rise from April 2026 onwards, so directors should check the latest official rate each year to ensure compliance.

Charging interest at or above this rate and paying it during the tax year normally prevents any benefit-in-kind tax from arising.

Why you need to be aware of this rate

The HMRC director’s loan interest rate directly affects how much tax you might pay if you borrow from your company. Any loan over £10,000 that charges less than the official rate can create a taxable benefit, which shows up on your Self Assessment and increases your personal tax bill.

Some examples of how this could affect you:

Example 1:

Imagine you borrow £20,000 from your company to cover personal expenses or a home renovation and don’t pay any interest. With the official rate at 3.75%, HMRC treats you as having received £750 of “income” that year. That means you could end up paying £££’s in extra tax, depending on your tax band.

Example 2:

If you charge yourself some interest, say 2%, HMRC still treats the remaining 1.75% (£350) as a taxable benefit. That’s money that comes straight out of your pocket as additional tax, even though you’ve already paid some interest to the company.

By charging at least the official rate and paying it during the tax year, you can avoid this extra tax altogether, keeping the loan genuinely interest-free from a tax perspective.

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Director’s loans done right: what to do and what to avoid

Managing a director’s loan might sound simple, but it’s surprisingly easy to get it wrong. Here’s a guide to the pitfalls to dodge and the smart moves to make so you stay on HMRC’s good side.

Think of it this way:

Director’s loans are flexible and useful, but mistakes can be costly. Follow the rules, plan ahead, and keep your records in order. Avoiding common pitfalls not only keeps HMRC happy but also protects your personal and company finances.
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Need a hand?

Being a Limited Company director comes with responsibilities, but it doesn’t have to be a headache. Crunch’s accountants can take care of the tricky stuff for you. We’ll make sure your director’s loan is handled correctly, the right interest is applied, repayments are on track, and your records are accurate. That way, you stay on HMRC’s good side, avoid unnecessary tax bills, and keep both your personal and company finances in order.

We can guide you on the timing of repayments, help you calculate any benefits in kind, and make sure everything is logged properly so you can sleep easy at night. No confusing forms, no last-minute panics, just straightforward support when you need it.

Think of us as your safety net for anything to do with director’s loans. You get to focus on running and growing your business while we make sure nothing slips through the cracks. Stress-free, done right, and with clarity every step of the way. Check out our Limited Company accounting packages now.

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