Want to raise the funds for a shiny new office space? Dreaming of building an all-star marketing team? Or aiming to launch a marketing disrupting product?
Whatever business moves you need money for, borrowing it from your Limited company could be a viable financing option - without the debt of a business loan or hassle of seeking external investment.
But is this even possible? You may ask. Many directors are unclear as to whether they can dip into company funds for personal use, to cover a short-term expense, fund a big purchase, or simply manage cash flow.
The answer is YES, you can borrow money from your Limited company. But (and it’s a big but!) there are tax implications and legal responsibilities/hazards to watch out for. Get it wrong, and you could end up with an unexpected tax bill or even trouble with HMRC.
So here we’ll explain everything you need to consider before taking money from your company, let’s make sure you do it the right way!
Is it legal to borrow money from your Limited company?
Yes, it is totally legal to borrow money, or take a ‘directors loan’ as it’s officially called, from your company, but rules apply. As a separate legal entity, your company isn’t your personal bank account, so any money taken as a loan must be recorded properly.
Handled correctly, a director’s loan is fine. But mismanagement and making errors could see you facing extra tax, interest charges, or even HMRC scrutiny. So make sure you know the risks and how to avoid them! Before you take the plunge.
{{ltd-guide}}
A director’s loans explained
So, what exactly is a director’s loan? Essentially, it’s when you take money from your Limited company that isn’t salary, dividends, or an expense repayment. It’s like borrowing from a separate entity, because legally, your company is separate from you.
To keep things in check, the company records this transaction in your director’s loan account (DLA). If you owe the company money, your DLA goes into the red, and HMRC starts paying attention.
Borrow too much or leave it unpaid for too long, and you could face extra tax charges (more on that later!).
Tax implications of borrowing money from your company
Borrowing from your company might seem simple, but HMRC has a few important and potentially costly catches you need to know about:
- Corporation Tax hit (Section 455 charge): If you don’t repay the loan within 9 months of your company’s year-end, HMRC slaps a 33.75% temporary tax charge on the outstanding amount. You’ll get this back—but only once the loan is fully repaid.
- Benefit in kind (BIK): If you borrow over £10,000 without paying interest, HMRC sees this as a ‘perk’, meaning you’ll owe personal tax, and your company pays extra National Insurance.
- Impact on company accounts: The loan affects your company’s balance sheet, and accountants will need to report it properly to stay compliant.
If you’re borrowing, have a solid plan to repay, otherwise, you could end up with extra tax headaches.
Repaying the loan – What are your options?
Once you’ve borrowed money from your company, believe it or not, you’ll still need to repay it (yes, even though it’s your company). Again, this means having a proper repayment plan is a must.
Here are your best options:
1. Pay it back in full
The simplest way to avoid tax issues. If you clear the loan within 9 months of your company’s year-end, you dodge the 33.75% Section 455 tax charge.
2. Take it as salary or dividends
Instead of repaying, you could classify the money as salary (subject to PAYE and National Insurance) or dividends (if the company has enough profits). Just be mindful of personal tax implications.
3. Write it off
The company can ‘forgive’ the loan, but this is treated as taxable income for you, so it’s rarely the best option.
4. Use multiple loans carefully
Trying to reset the 9-month rule by repaying and immediately re-borrowing? HMRC has anti-avoidance rules to stop this trick.
Whichever one you choose, planning ahead and repaying on time will help keep things simple and tax-efficient.
Main risks to be aware of
Borrowing from your company might seem like an easy win, but there are a few traps that can catch you out. We already mentioned two of them;
- Struggling to repay – If you don’t repay within 9 months of your company’s year-end, you’ll face the 33.75% Section 455 tax charge—money that could have been used elsewhere.
- Benefit in kind (BIK) charges – Borrow over £10,000 interest-free? HMRC treats it as a taxable perk, meaning personal tax for you and extra National Insurance for your company.
And in addition;
- Messy director’s loan account (DLA) – If your DLA isn’t kept up to date, you could accidentally trigger tax charges or even make it look like you’re mismanaging company funds.
- HMRC’s anti-avoidance rules – Repaying a loan just to take out a new one (known as ‘bed and breakfasting’) won’t work—HMRC is wise to this and may still apply tax charges.
{{cta-limited-company}}
Take the cash, but don’t dash – borrow smart!
Borrowing can be fine, but only if you’re careful. Keep records, stick to repayment deadlines, and don’t let things get out of control!
Borrowing money from your Limited company is possible, but it’s not as simple as just dipping into the business bank account. Done right, it can be a useful short-term option. But if you mess this up you could face unexpected tax bills, extra admin headaches, or even HMRC enquiries.
The key is to plan ahead. Keep track of your director’s loan account, understand the tax rules, and have a structured repayment strategy. If you're unsure about the best way to borrow from your company, getting professional advice can save you a lot of time, hassle, and money in the long run.