What is a Director's Loan Agreement and when is one required under the Companies Act 2006?

A Director's Loan Agreement is a formal written contract between a company and one of its directors that records the terms of a financial loan made between them. Such loans can be made either from the company to the director (the more common scenario) or from the director to the company. Under the Companies Act 2006, transactions involving loans to directors fall within the 'related party transactions' regime set out in ss197-214. Section 197 requires that a company may not make a loan to a director of the company or of its holding company unless the transaction has been approved by an ordinary resolution of the members. If the company is a public company (or associated with one), more stringent rules apply under ss198-200. A written agreement is strongly recommended in all cases to document the terms clearly, demonstrate compliance with the approval requirement, and protect both the company and the director in the event of a dispute or an HMRC enquiry.

What is the HMRC beneficial loan charge and when does it apply to a director's loan?

The HMRC beneficial loan charge applies where a company provides a loan to a director (or other employee) at an interest rate below the HMRC official rate, or at no interest at all, and the outstanding balance exceeds £10,000 at any time during the tax year. Under the Income Tax (Earnings and Pensions) Act 2003 s175, the notional interest foregone (i.e. the difference between what the director actually paid and what they would have paid at the HMRC official rate) is treated as a taxable benefit in kind. The official rate for 2024-25 is 2.25% per annum. The benefit must be reported by the employer on form P11D by 6 July following the end of the tax year, and is subject to Class 1A National Insurance Contributions at 13.8%. The director pays income tax on the benefit through their self-assessment tax return. To avoid the beneficial loan charge entirely, the company should charge interest at or above the HMRC official rate on loans exceeding £10,000.

What is the s455 Corporation Tax charge on an overdrawn director's loan account?

Section 455 of the Corporation Tax Act 2010 imposes a Corporation Tax charge on 'loans to participators' (which includes director-shareholders of close companies — broadly, companies controlled by five or fewer shareholders). Where a director's loan account is overdrawn at the end of the company's accounting period and the balance has not been repaid or released within 9 months and 1 day of the accounting year-end, the company must pay a s455 tax charge of 33.75% (as of April 2023) on the outstanding balance. This charge must be reported and paid on the company's CT600 tax return. Importantly, the s455 charge is a temporary tax: it is repayable by HMRC to the company once the loan is repaid, written off, or released. However, the company must wait until 9 months and 1 day after the end of the accounting period in which repayment occurred before reclaiming the tax. Anti-avoidance rules also apply to prevent arrangements designed to circumvent the charge.

Does a director's loan need shareholder approval under section 197 of the Companies Act 2006?

Yes, in most cases. Section 197 of the Companies Act 2006 prohibits a company from making a loan to a director of the company or of its holding company unless the loan has been approved by an ordinary resolution of the members of the company before the transaction is entered into. For a public company (or a company associated with a public company), the rules are more restrictive and cover not just loans but also quasi-loans and credit transactions (ss198-200). There are several exceptions: under s207, loans for the purposes of meeting expenditure on defending criminal or regulatory proceedings may be made without member approval if certain conditions are met; under s200, loans that are qualifying business transactions (i.e. made in the ordinary course of the company's business and on the same terms as to comparable third parties) are also exempt. For private companies where the director is the sole shareholder, written shareholder consent is still required as a matter of good governance and to protect against future disputes.

What happens if a director's loan is written off by the company?

If the company writes off or releases the outstanding balance of a director's loan, the amount written off is treated as income in the hands of the director for income tax purposes. Under ITEPA 2003 s188 and HMRC guidance, the written-off amount is treated as a deemed dividend (for director-shareholders) or earnings (for non-shareholder directors), and is subject to income tax accordingly. For director-shareholders of close companies, the write-off is treated as a distribution and taxed as dividend income at dividend tax rates. In addition, the write-off triggers a repayment of any s455 Corporation Tax previously paid by the company, but the company must also account for the deemed distribution through its payroll or self-assessment processes. From a practical standpoint, writing off a director's loan is generally less tax-efficient than repaying it, and professional advice should be sought before any write-off is agreed.

Can a director lend money to their own company, and is there a tax advantage in doing so?

Yes, a director can lend money to their own company, and director-to-company loans are a common way of providing working capital, particularly in owner-managed businesses. There is no member approval requirement for loans from directors to their company under the Companies Act 2006 (the approval regime in ss197-214 applies only to loans from the company to a director). From a tax perspective, if the company pays interest on the director's loan, the interest is a deductible business expense for the company (reducing its Corporation Tax liability) and is income for the director, taxable at the director's marginal rate of income tax. To benefit from the 20% basic rate tax deduction at source, the company should deduct income tax from interest payments and pay it over to HMRC under the 'loan relationship' rules. However, if the director charges no interest, there are no immediate tax consequences for either party (unlike company-to-director loans which attract the beneficial loan charge).

Director's Loan Agreement (UK) — United Kingdom

Create a compliant Director's Loan Agreement for England and Wales. Covers Companies Act 2006 ss197-214 member approval, HMRC beneficial loan charge (ITEPA 2003 s175), s455 Corporation Tax on overdrawn director's loan accounts, HMRC official interest rate, board resolution requirements, and repayment terms. Suitable for both company-to-director and director-to-company loans.

What Is a Director's Loan Agreement (UK)?

A Director's Loan Agreement is a formal written contract between a company registered in England and Wales and one of its directors, documenting the terms on which a loan is made between them. Unlike an ordinary commercial loan agreement, a director's loan arrangement is subject to a specific and detailed statutory regime under the Companies Act 2006 (ss197-214), as well as significant HMRC tax rules that can result in Corporation Tax charges, personal income tax liabilities, and National Insurance obligations if not properly managed.

A director's loan arises whenever a company lends money to a director, or a director lends money to their own company, outside of the director's salary, dividends, or expense reimbursements. The most common scenario is where a director withdraws funds from the company for personal use (creating a debit balance on their director's loan account), or where a director injects personal funds into the company to provide working capital or bridging finance (creating a credit balance). In either case, a written Director's Loan Agreement is the correct way to record the arrangement, set out the repayment terms, address the interest rate, and ensure that both parties understand their obligations.

The Companies Act 2006 imposes member approval requirements for loans from a company to one of its directors (s197), and additional rules apply to loans to directors of holding companies, shadow directors, and connected persons. Breach of these requirements renders the loan voidable at the instance of the company, and the director may be required to account for any gain made and indemnify the company for any loss suffered (s213). A well-drafted Director's Loan Agreement demonstrates compliance with these statutory requirements and provides a clear evidential record for Companies House filings, HMRC enquiries, and any future audit.

When Do You Need a Director's Loan Agreement (UK)?

A Director's Loan Agreement is needed whenever a company incorporated in England and Wales makes a loan to one of its directors, or a director lends personal funds to their own company, and the transaction is not covered by existing salary, dividend, or expense arrangements.

The most common situations that require a Director's Loan Agreement include: a director drawing funds from the company for personal use in anticipation of a forthcoming dividend; a director-shareholder providing short-term bridging finance to the company; a company funding a director's house purchase or vehicle acquisition (where the loan amount exceeds £10,000 and the beneficial loan charge is potentially applicable); a founding director formalising an informal arrangement under which they have been injecting personal funds into the company without documentation; and a start-up company where the founding director is the primary source of working capital before external investment is secured.

A Director's Loan Agreement is also advisable where the company is preparing for a due diligence process, an equity investment round, or a sale, because prospective investors and acquirers will want to see that all related-party transactions are properly documented and have been approved in accordance with the Companies Act 2006. HMRC may also request evidence of the loan terms during a Corporation Tax enquiry or a PAYE compliance check, particularly where the existence of a director's loan account results in a s455 Corporation Tax charge or a P11D benefit in kind.

Note that the s455 Corporation Tax charge (33.75% of the outstanding balance) applies where the company's loan to a director remains unpaid beyond 9 months and 1 day after the end of the company's accounting period. To avoid this charge, directors should ensure that loans are repaid within the relevant time window or that the repayment schedule is clearly set out in a written agreement.

What to Include in Your Director's Loan Agreement (UK)

A Director's Loan Agreement for use in England and Wales should contain several key provisions to ensure legal compliance and protect both the company and the director.

The parties clause should identify the company (by its full registered name and Companies House registration number) and the director (by full legal name and residential address), and should specify the direction of the loan (company to director, or director to company).

The loan amount and drawdown clause should state the principal sum in figures and words, specify the method of advance (bank transfer, credit to the director's loan account, or cheque), and confirm the drawdown date. For company-to-director loans, the agreement should confirm that member approval under Companies Act 2006 s197 has been obtained and should cross-reference the relevant board resolution.

The interest clause should specify whether interest is charged, and if so, at what annual rate. For company-to-director loans, charging interest at or above the HMRC official rate (2.25% per annum for 2024-25) avoids the P11D beneficial loan charge under ITEPA 2003 s175. The frequency of interest payments (monthly, quarterly, annually, or on repayment) should also be stated.

The repayment clause should set out the repayment schedule clearly: whether repayment is made in a single lump sum on a fixed date, in regular instalments, or on demand. For company-to-director loans, the repayment date should be set no later than 9 months and 1 day after the company's accounting year-end to avoid the s455 Corporation Tax charge.

The tax acknowledgment clause should confirm that both parties are aware of the s455 CT charge, the P11D benefit in kind rules, and the implications of a write-off of the loan balance. The company's accounting year-end date should be recorded.

The default clause should address what happens if the borrower fails to repay on time, including the right for the lender to demand immediate repayment of the full outstanding balance, and a default interest rate. The agreement should also address early repayment rights.

The governing law clause should confirm that the agreement is governed by the laws of England and Wales, and should include an exclusive jurisdiction clause in favour of the courts of England and Wales. The rights of third parties under the Contracts (Rights of Third Parties) Act 1999 should be expressly excluded.

What Is a Director's Loan Agreement (UK)?

When Do You Need a Director's Loan Agreement (UK)?

What to Include in Your Director's Loan Agreement (UK)

Frequently Asked Questions

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