Director’s Loan vs Shareholder Loan: Key UK Tax Differences
A shareholder loan involves money moving between a shareholder and their company, while a director’s loan involves money moving between a director and the company. In many owner-managed companies the same individual is both director and shareholder, so the two terms can overlap. However, the legal role of the individual, the direction of the payment and whether the person is a participator in a close company determine which tax and company-law rules apply.
In owner-managed limited companies, it is common for money to flow between the company and its directors or shareholders outside of salary and dividends. Understanding how these transactions are classified – and what the tax and legal consequences are is essential for any company director or shareholder.
This article explains the difference between a director’s loan and a shareholder loan, the tax rules that apply to each, and the compliance steps you need to follow.
What Is a Director’s Loan?
A director’s loan is any money taken from a company by a director that is not salary, a dividend, a reimbursement of business expenses, or money the director has previously lent to the company. These transactions are recorded in the Director’s Loan Account (DLA) a running ledger that shows the net position between the director and the company at any point in time.
If the DLA is overdrawn, the director owes money to the company. If it is in credit, the company owes money to the director (for example, where the director has previously lent personal funds to the business).
What Is a Shareholder Loan?
A shareholder loan is money lent between a shareholder and the company in which they hold shares. The money can move in either direction: a shareholder may lend personal funds to the company, or a company may lend money to a shareholder. The tax consequences differ significantly depending on that direction.
Shareholder to Company vs Company to Shareholder
The direction of the loan is critical:
- Shareholder → company: the shareholder provides money to the business and the company generally owes that amount back to the shareholder.
- Company → shareholder: the company lends money to the shareholder. If the company is a close company and the shareholder is a participator, Section 455 and related rules may need to be considered.
These two situations should not be treated as interchangeable. A repayment of money previously lent by a shareholder to the company is fundamentally different from a shareholder taking a new loan from company funds.
In practice, in many small owner-managed companies, the director and shareholder is the same person. Where that is the case, the distinction between a director’s loan and a shareholder loan is largely a company law question rather than a separate tax category. Both types of loan to participators in aclose company are subject to the same analysis under Section 455 of the Corporation Tax Act 2010 (see below).
Director’s Loan vs Shareholder Loan: What Is the Difference?
| Point | Director’s loan | Shareholder loan |
|---|---|---|
| Who is involved? | A director and the company. | A shareholder and the company. |
| Direction of money | The director may lend money to the company or borrow money from it. | The shareholder may lend money to the company or receive a loan from it. |
| Accounting record | Usually recorded through a director’s loan account. | Usually recorded through a shareholder loan account or relevant loan ledger. |
| Section 455 | May apply where the director is also a participator, or an associate of one, and a relevant loan from a close company remains outstanding. | Can apply where a close company makes a relevant loan or advance to an individual shareholder or other participator. |
| Benefit in kind | An employment-related beneficial-loan charge may arise where the relevant conditions are met. | Being a shareholder alone does not automatically create an employment-related beneficial-loan charge; the individual’s employment/director position also matters. |
| Company-law considerations | Loans to directors can be subject to Companies Act approval requirements. | The treatment depends on the shareholder’s relationship with the company and the terms of the transaction. |
What Is a Shareholder Loan Account?
A shareholder loan account records money moving between a shareholder and the company. A credit balance generally indicates that the company owes money to the shareholder, while a debit balance can indicate that the shareholder owes money to the company.
The account should clearly record advances, repayments, personal expenses paid by the company, funds introduced by the shareholder and any interest charged. Accurate records are particularly important where the shareholder is also a director because the same transactions may also affect a director’s loan account and trigger tax or reporting considerations.
Section 455 Tax on Director and Shareholder Loans
Section 455 of the Corporation Tax Act 2010 can apply where a close company makes a loan or advance to an individual who is a participator in the company, or an associate of a participator. A shareholder is normally a participator, which is why the rules are particularly important for loans from owner-managed companies to shareholders.
If a relevant loan remains outstanding nine months and one day after the end of the company’s accounting period, the company may have to pay a temporary Section 455 Corporation Tax charge on the outstanding balance.
- Loans made on or after 6 April 2026: Section 455 rate of 35.75%.
- Loans made from 6 April 2022 to 5 April 2026: Section 455 rate of 33.75%.
- Loans made from 6 April 2016 to 5 April 2022: Section 455 rate of 32.5%.
Section 455 is a company tax charge rather than an additional permanent tax on the borrower. Relief may normally be claimed once the qualifying loan is repaid, released or written off, although the timing and tax treatment need to be handled correctly.
Importantly, not every director’s loan automatically falls within Section 455. The legislation is specifically concerned with loans and advances by close companies to participators and certain associates or connected arrangements. This is why it is important to identify whether the borrower is acting as a director, shareholder, participator or a combination of these roles.
When Does a Director’s Loan Become a Benefit in Kind?
If a director or employee receives a cheap or interest-free loan through their employment, a taxable benefit can arise under the beneficial-loan rules. For shareholder-directors, HMRC states that where the amount owed to the company exceeds £10,000 at any time in the tax year, the company may need to treat the loan as a benefit in kind if the relevant conditions apply.
First, if a director or shareholder is loaned more than £10,000 from the company and interest is not charged at HMRC’s official rate, the difference between the interest actually paid (if any) and what would have been charged at the official rate is treated as a taxable benefit in kind for the director. The HMRC official rate for 2025-26 is 3.75% (reviewed quarterly). The benefit in kind must be reported on the P11D, and the company must pay Class 1A National Insurance on the benefit.
Second, loans over £10,000 must be approved by shareholders through an ordinary resolution under the Companies Act 2006. Failing to obtain this approval is a breach of company law, regardless of the tax position.
HMRC’s official rate of interest is currently 3.75% from 6 April 2026. Where interest is charged below the applicable official rate, the difference may form part of the taxable benefit.
The Shareholder Approval Requirement
Loans to directors can also create company-law requirements separate from the tax rules. Under the Companies Act 2006, member approval may be required before a company makes a loan to a director, subject to the statutory exceptions that apply to particular transactions. Where approval is required, the terms and amount of the proposed loan should be properly documented.
The approval should be documented through board minutes and a shareholder resolution. Loans that do not require approval – because they are below £10,000 – should still be properly recorded in the DLA and disclosed in the annual accounts.
The Bed-and-Breakfasting Anti-Avoidance Rule
HMRC is aware that directors may attempt to repay a loan just before the nine-month deadline and then re-borrow shortly after, in order to avoid the S455 charge. To prevent this, HMRC applies an anti-avoidance rule: if a loan of £5,000 or more is repaid and a new advance of £5,000 or more is made within 30 days of that repayment, the repayment is ignored for S455 purposes.
In other words, genuine repayment is required. The loan must be cleared and stay cleared. Directors found to be cycling repayments and re-advances to avoid S455 will find the charge applies regardless.
Repaying the Loan
The cleanest way to clear an overdrawn DLA is to repay it in cash. Alternatively, if the company has sufficient distributable profits, the director can declare a dividend and offset it against the loan balance – effectively converting the loan into a post-tax dividend withdrawal. This approach requires the company to have genuine distributable profits and must be formally documented with board minutes and a dividend voucher.
A loan can also be cleared by the company paying additional salary or a bonus, though this carries PAYE and National Insurance costs for both the director and the company. Writing off the loan is another option but creates a taxable benefit equal to the written-off amount.
Key Practical Steps
- Monitor the DLA balance throughout the year – do not wait until accounts preparation to discover the balance is overdrawn
- Ensure any loans over £10,000 have formal shareholder approval documented in board minutes
- If the balance will be overdrawn at the accounting period end, calculate the potential S455 exposure and factor it into cash flow planning
- Charge interest on loans at HMRC’s official rate (currently 3.75%) to avoid a benefit in kind charge if the balance exceeds £10,000
- Disclose all director loan transactions in the company’s annual accounts – this is a legal requirement
