Directors’ Loan Accounts: Keeping Business and Personal Finances Separate

For directors of small or family-run companies, it can be easy for personal and business finances to become blurred. A director may take money from the company, use the company card for a personal purchase, or pay a personal bill from the business account. While these transactions may seem harmless, they can have tax consequences if they are not dealt with correctly.

This is where the director’s loan account comes in. In simple terms, the loan account records money passing between the director and the company.

If a director takes money from the company without it being treated as salary or a dividend, it will normally be recorded as an amount owed by the director to the company. The account should be kept up to date throughout the year rather than being left until the accounts are prepared.

One of the key rules to be aware of is Section 455 tax. If a director’s loan is still outstanding nine months and one day after the end of the company’s accounting period, the company may have to pay an additional Corporation Tax charge on the outstanding amount. The rate of this charge is linked to the dividend higher rate and is currently 35.75% (33.75% for loans made on or before 05 April 2026).

Importantly, this isn’t necessarily a permanent tax cost. Where the loan is subsequently repaid, the company can generally reclaim the Section 455 tax, although there can be a significant delay before the tax is recovered.

There can also be tax implications for the director personally. If a director has a company loan exceeding £10,000, an interest-free or low-interest loan can result in a taxable benefit-in-kind, potentially creating an Income Tax liability for the director and National Insurance for the company.

It is also important to remember that paying something from the company bank account does not make it a business expense. Personal expenditure should not simply be put through the accounts as a company cost. It needs to be identified and dealt with appropriately, often through the director’s loan account.

The best advice is therefore to keep personal and business finances separate wherever possible. If you need to take money from your company, speak to your accountant first about the most tax-efficient and appropriate way to do so.

Regularly reviewing the director’s loan account can also prevent small transactions from building into a substantial balance and potentially an unexpected tax bill.

The company may belong to you, but its bank account is not your personal bank account. Keeping that distinction clear can save both money and headaches.

Leah Doherty is a trainee Chartered Accountant at Abac, Chartered Accountants.

This article is for general information only. You are recommended to seek professional advice before taking action on the basis of the contents of this article.