Charging Interest on Director Loans

Most companies receive cash injections from directors which result in credit balances on individual director loan accounts .

When in credit, these director loan accounts can be treated similarly to personal bank accounts - any credit balance can be withdrawn without needing to declare dividends, pay tax or make a report on self-assessment returns.

It is possible to charge the company interest on director loan credit balances - and can be a good tax efficient option - as long as the rate of interest charged is at a commercial or market rate. Currently this could be anywhere between 5% and 15% depending on the terms involved.

Charging interest on director loans can be a tax efficient option for both the company and director

Implications for the company

When paying the interest, the company must deduct 20% basic rate tax and pay this directly to HMRC (the interest is a form of income for the director).

This is done using a CT61 form which is due for submission 14 days after the end of the quarter in which the interest is paid. The quarters are March, June, September and December. It is preferable to pay interest annually to reduce the amount of admin necessary.

The director will receive the net amount. For example, if £100 interest is charged, £20 will be paid to HMRC and £80 will be paid to the director.

The gross amount of interest paid is a tax deductible expense for the company and will reduce the amount of corporation tax the company is liable to pay (between 19% and 25%).

Implications for the director

The director will need to declare the interest received on their self-assessment return.

For example, if you were on a director salary of £1,048 per month (primary threshold) you could earn almost £6,500 (lower earnings limit) in interest annually without paying tax (for tax year 2025/26).

Points to note:

It would be sensible to formalise in writing any agreements and the rate of interest to be charged.

Tax savings will be affected if a director has other income which moves them into higher tax bands.

Additional admin and record keeping for use of CT61 forms can be burdensome.

This document is a simplified helpsheet and careful research should be completed if you are unsure.

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Verifiable Accounts - Professional Financial Accountants providing Tax Preparation and Accounting Services