Can I Lend Money to My Limited Company

At Towerstone Accountants we provide specialist limited company accountancy services for directors and owner managed businesses across the UK. We wrote this guide for people running a company who want clear answers on tax, payroll, Companies House filing duties, and day to day compliance without jargon. Our aim is to help you understand your responsibilities, reduce the risk of penalties, and know when to get professional support.

This is a question I deal with constantly, often when a director has put personal money into their company to keep things moving, cover a tax bill, or fund growth, and then realises they want to understand how it should be treated properly. The good news is yes, you can lend money to your limited company, and it is both common and entirely legitimate under UK law. What matters is how the loan is structured, recorded, and repaid, and whether interest is charged correctly and declared properly for tax purposes.

In this article I will explain how lending money to your limited company works in practice, how it should be recorded in the accounts, whether you should charge interest, how interest is taxed personally, and the mistakes I see most often. I am writing this as a chartered accountant who works with owner managed companies every day, and everything here is based on current UK guidance and real world experience.

What it means to lend money to your limited company

A limited company is a separate legal entity, even if you are the only director and shareholder. This means that when you put your own money into the company, you are not simply moving money around, you are entering into a financial transaction between two separate parties.

If you lend money to your company, that money does not become company income, and it is not taxable as profit. Instead, it becomes a liability of the company, meaning the company owes that money back to you. This is usually recorded through what is known as a director’s loan account.

In simple terms:

• You lend money personally
• The company receives cash
• The company owes you that amount
• The amount can be repaid tax free

This is very different from taking money out of the company, which often triggers tax consequences.

Common reasons directors lend money to their company

In practice, I see directors lend money to their companies for a range of sensible reasons, particularly in the early stages of a business or during periods of growth.

Common reasons include:

• Funding start up costs before the business generates income
• Covering short term cash flow gaps
• Paying Corporation Tax or VAT when cash is tight
• Purchasing equipment or stock
• Avoiding expensive external borrowing

From an accounting and tax perspective, lending your own money is often cleaner and cheaper than using overdrafts or commercial loans, provided it is documented correctly.

How director loans are recorded in the accounts

When you lend money to your limited company, the correct accounting treatment is to record the amount as a credit to your director’s loan account. This reflects that the company owes you money.

From an accounting point of view:

• The company bank balance increases
• A liability called the director’s loan account increases
• There is no impact on profit

This is important, because I often see directors worry that lending money will increase Corporation Tax, which it does not. A loan is not income, and it does not appear in the profit and loss account.

The director’s loan account will appear on the balance sheet, usually under creditors, and it represents the amount the company owes you at any given time.

What happens when the company repays the loan

When your limited company repays money you previously lent, that repayment is not taxable income for you personally. It is simply the company returning money it owes.

This is one of the key benefits of lending money to your company. Unlike dividends or salary, loan repayments do not attract Income Tax or National Insurance.

From an accounting perspective:

• The company bank balance decreases
• The director’s loan account decreases
• There is no impact on profit

As long as the loan account is in credit, meaning the company owes you money, repayments are generally tax free.

Do I need a formal loan agreement

Legally, a loan can exist without a written agreement, but from a professional and practical point of view, I strongly recommend having one, especially if the amounts involved are significant or if interest is being charged.

A basic director loan agreement should cover:

• The amount of the loan
• Whether interest is charged
• The interest rate
• Repayment terms
• Whether the loan is repayable on demand

This does not need to be overly complex, but it helps demonstrate that the loan is genuine and commercial rather than informal or unclear.

Can I charge interest on money I lend to my company

Yes, you can charge interest on money you lend to your limited company, and in some cases it can be a sensible planning tool. However, interest needs to be handled carefully from both an accounting and tax perspective.

If interest is charged:

• The company treats the interest as a finance cost
• The interest reduces the company’s taxable profits
• You receive interest personally
• The interest is taxable income for you

Interest must be charged at a reasonable commercial rate. Charging excessive interest purely to extract profits is risky and can be challenged.

What is a reasonable interest rate

There is no single fixed rate that must be used, but the rate should broadly reflect what the company might pay for a similar unsecured loan from a third party.

In practice, many directors use:

• A modest fixed rate
• A rate linked to base rate plus a margin
• A rate similar to personal savings or loan rates

The key is consistency and justification. I always advise clients to document why a particular rate was chosen.

How interest is recorded in the accounts

When interest is charged on a director’s loan:

• The company records interest as an expense in the profit and loss account
• The director’s loan account increases by the interest amount
• The company may withhold tax from the interest

This last point is important and often misunderstood.

Tax deducted at source on interest

If your company pays interest to you personally, it is required to deduct basic rate Income Tax at source, currently 20 percent, unless an exemption applies.

This means:

• The company pays you interest net of tax
• The company pays the deducted tax to HMRC
• You declare the gross interest on your tax return

The deducted tax counts as tax already paid and is credited against your personal tax liability.

Failing to deduct tax at source is a common mistake and can lead to penalties and interest.

Do I have to pay personal tax on the interest

Yes, interest you receive from your limited company is taxable income for you personally. It is treated in the same way as other interest income.

How much tax you pay depends on:

• Your total income
• Your personal savings allowance
• Your marginal tax rate

For many basic rate taxpayers, some or all of the interest may fall within the personal savings allowance, but it must still be declared.

Does the personal savings allowance apply

In many cases, yes. Interest from a director’s loan is classed as savings income, so the personal savings allowance can apply.

Currently:

• Basic rate taxpayers have a £1,000 allowance
• Higher rate taxpayers have a £500 allowance
• Additional rate taxpayers have no allowance

If your total savings income exceeds your allowance, tax is due on the excess.

How interest is reported on your Self Assessment

Interest received from your company must be included on your Self Assessment tax return. You should report the gross interest, not the net amount received.

The tax deducted by the company is then offset against your overall tax bill.

I regularly see errors here, particularly where directors assume interest does not need to be declared because tax was already deducted, which is not correct.

What if I do not charge interest

You are not required to charge interest on money you lend to your company. Many directors choose not to, particularly where the loan is short term or where simplicity is preferred.

If no interest is charged:

• There is no interest income to declare
• There is no tax deduction required
• The loan remains repayable tax free

This is perfectly acceptable, and often the simplest approach.

Can lending money cause any tax problems

Generally, lending money to your company does not create tax issues, but problems can arise if records are poor or arrangements are confused.

Common issues I see include:

• Mixing loans with salary or dividends
• No clear record of amounts lent
• Interest charged but not taxed correctly
• Repayments taken when the loan account is overdrawn

Good bookkeeping and clear advice usually prevent these problems.

What happens if the company cannot repay the loan

If a company becomes insolvent and cannot repay a director’s loan, the position can become more complex. In many cases, the loan may be written off.

From a personal tax perspective, relief is limited and depends on the circumstances. This is an area where early advice is essential.

How lending compares to putting money in as share capital

Directors sometimes ask whether it is better to lend money or invest it as share capital.

In simple terms:

• Loans can be repaid tax free
• Share capital cannot easily be withdrawn
• Loans offer more flexibility
• Share capital strengthens the balance sheet

In practice, many companies use a mix of both.

Common mistakes I see in practice

The most common problems I encounter include failing to record loans properly, assuming repayments are taxable, forgetting to deduct tax on interest, and not declaring interest on Self Assessment.

These mistakes are rarely deliberate, but they can be costly.

Final thoughts

Lending money to your limited company is a normal and sensible thing to do, and when handled correctly it offers flexibility and tax efficiency. The key is treating the loan as what it is, a genuine financial transaction between you and your company, supported by proper records and sensible tax treatment.

If you are unsure how your loan should be structured or whether charging interest makes sense in your situation, getting advice early will usually save time, tax, and stress later on.

You may also find our guidance on What happens if my Director’s Loan Account is overdrawn and Can I take money out of my company tax free helpful when exploring related limited company questions. For a broader overview of running and managing a company, you can visit our limited company hub.