Documenting a director's loan to the company

When a director lends money to their company, put the terms in a written loan agreement signed for the company, have the board approve it after the director declares their interest, and minute the decision. The agreement should state the amount, the interest rate and payment dates, when and how the loan is repaid, and whether it is secured. The company then records the balance in the director’s loan account and deals with tax on any interest.

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Why document a loan the director could simply transfer?

Money a director pays into the company is not automatically a loan. Without evidence, it can later be argued to be a gift, a capital contribution or payment for shares, and the director may struggle to prove what is owed or when it can be called in. Clear terms protect the director, reassure the company’s bank and auditors, and give an insolvency practitioner something to work with if the company later fails.

There is also a legal requirement in one common case. Section 231 of the Companies Act 2006 applies where a limited company with only one member contracts with that member, the member is also a director, and the contract is not in the ordinary course of the company’s business. Unless the contract is in writing, the company must set out its terms in a written memorandum or record them in the minutes of the next board meeting. Failure is an offence by every officer in default, although section 231(6) says it does not affect the validity of the contract.

GOV.UK guidance also says a director must keep a record of any money they borrow from or pay into the company, usually called a director’s loan account. Our page on the director’s loan account explains how that account works.

What should the loan agreement say?

A short agreement is usually enough for a simple director loan. It should cover:

Parties and amount. The director as lender, the company as borrower, the amount and whether it is advanced at once or in tranches.
Purpose. Working capital, a specific purchase or a bridging need. This helps later if anyone asks why the company borrowed.
Interest. The rate, how it accrues, the dates it is paid and a statement that the company will deduct income tax where the law requires it. An interest free loan should say so expressly.
Repayment. A fixed date, instalments, or repayable on demand, with any notice period. State whether the company may repay early.
Ranking and security. Whether the loan is unsecured, subordinated to the bank or secured by a charge. Security is covered in whether a director can take security over company assets.
Events of default. For example insolvency or a change of control, allowing the director to demand repayment.

Section 44 says a document is validly executed by a company if signed by two authorised signatories, meaning directors or a company secretary, or by a director in the presence of a witness who attests the signature. Where possible, a director other than the lender should sign for the company so that it is clear who acted on each side.

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How should the board approve the loan?

Section 177 requires a director who is interested in a proposed transaction with the company to declare the nature and extent of the interest to the other directors before the company enters into it. The declaration can be made at a board meeting, by written notice under section 184 or by general notice under section 185. A director lending to their own company is plainly interested.

The articles then decide whether the lender can vote. Under paragraph 14 of the model articles for private companies, a director interested in a transaction with the company is not counted for quorum or voting purposes unless an exception applies. The exceptions include an ordinary resolution of the members disapplying the rule, an interest that cannot reasonably be regarded as likely to give rise to a conflict, and listed permitted causes such as a guarantee given by a director for the company’s obligations. A director’s loan is not on that list. Paragraph 11 sets the quorum at two unless fixed otherwise. In a two director company where one director is the lender, the board may therefore not be quorate, and an ordinary resolution of the members is the usual fix.

A company with a single director, where the articles do not require more than one, can rely on paragraph 7(2) of the model articles, which lets that director take decisions without the usual decision making rules. See sole director decisions.

Section 248 requires minutes of board meetings to be kept for at least ten years, and paragraph 15 of the model articles requires a written record of every unanimous or majority decision for the same period. The minute should record the declaration of interest, who was counted in the quorum, the terms approved, and who was authorised to sign. Our guide to board minutes has a template structure.

What tax points should the paperwork deal with?

GOV.UK says the company does not pay Corporation Tax on money a director lends it. If interest is charged, it is a business expense for the company and personal income for the director, which the director reports on a Self Assessment return.

Section 874 of the Income Tax Act 2007 requires a company paying yearly interest to deduct income tax at the savings basic rate. GOV.UK states this as 20% and says the company reports and pays the tax quarterly on form CT61. HMRC’s Company Taxation Manual at CTM35110 says each return period ends on 31 March, 30 June, 30 September, 31 December or the end of the accounting period, and returns are due within 14 days of the end of the period. The savings basic rate is due to become 22% for 2027 to 2028, and HMRC’s technical note says withholding on yearly interest will follow the savings basic rate.

Whether interest is yearly depends on case law. HMRC’s Savings and Investment Manual at SAIM9075 says a loan for less than a year is presumed to give short interest, while a loan with a measure of permanence is likely to give yearly interest. Writing a term of over a year into the agreement will normally bring it within the deduction rules.

Timing also counts. HMRC’s Corporate Finance Manual at CFM35810 explains that where a close company owes interest to a participator and does not pay it within 12 months of the end of the accounting period in which it accrues, the company’s deduction is deferred until it is paid, unless the creditor is taxed on it under the loan relationship rules. A director lender who lets interest roll up can therefore delay the company’s relief. More detail is in charging interest on a loan to your company.

How should repayment terms be framed?

A loan repayable on demand gives the director flexibility but leaves the company uncertain about when it must find the money. A fixed term with instalments is easier for the company to plan around.

Whatever the terms, repayment must happen in line with them, and the director must take care if the company is struggling. Under section 239 of the Insolvency Act 1986 a liquidator or administrator can challenge a payment that puts a creditor in a better position than they would otherwise have been in an insolvent liquidation. Section 240 sets the look back period at two years for a person connected with the company, and section 239(6) presumes that a connected person was preferred deliberately. A director is connected with their own company under section 249.

How does this work in practice?

Illustration only. Priya and Tom are the two directors and shareholders of Brightside Ltd, which uses the model articles. Priya lends the company £50,000 for three years at 5% a year, with interest paid annually.

Before the board meeting, the members pass an ordinary resolution disapplying paragraph 14 for this loan, so Priya can be counted in the quorum.
Priya declares her interest. The board approves the agreement and authorises Tom to sign for the company.
Each year the interest is £2,500. In 2026 to 2027 the company deducts £500 at 20%, pays Priya £2,000 and reports the £500 on form CT61 for that quarter.
The £50,000 sits as a credit in Priya’s director’s loan account and as a liability in the company’s balance sheet.

What mistakes come up most often?

No paperwork at all, so the director cannot prove the money is a loan.
A board approval that was not quorate because the lender was counted.
Paying interest gross without deducting tax or filing CT61.
Letting interest accrue for years, which can defer the company’s deduction.
Repaying the director ahead of other creditors when the company is already in trouble. See directors as creditors of their insolvent company.

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Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.

Documenting a director’s loan to the company