Funding your company: loan or shares

Q: How does this compare in numbers?

Illustration only. Ravi, a higher rate taxpayer, puts £50,000 into his trading company. Assume the company pays Corporation Tax at the 25% main rate and the business later fails with nothing left for him. Point of comparison£50,000 loan at 5%£50,000 of new shares Annual return£2,500 interest, deductible by the companyDividends paid from taxed profits Corporation Tax saved by the company each year£625None Tax deducted at source£500 at 20%, paid via CT61None Getting the £50,000 back while tradingRepaid as a debt, no taxBuyback or capital reduction procedure needed If the company failsCapital loss of £50,000, usable only against gainsShare loss relief against income, worth up to £20,000 at 40% if conditions met Ravi's choice depends on whether he values flexibility and a deductible return more than the protection that share loss relief gives if the business fails.

Q: What paperwork does each route need?

Loan. A short written agreement setting out the amount, any interest rate, when interest is paid and how the loan is repaid. If interest is paid, the company must request form CT61 from HMRC. Shares. The approvals the articles require, an update to the register of members and, under section 555 of the Companies Act 2006, a return of allotment with a statement of capital delivered to Companies House within one month. See allotting shares.

Q: What mistakes come up most often?

Calling it a loan with no evidence. Without a record, HMRC and a liquidator may treat money put in as something else. Paying interest without deducting tax. The company is liable for tax it should have withheld. Buying existing shares and expecting share loss relief. Only subscribed shares qualify. Converting a loan into shares without thinking about relief. HMRC's guidance at CG65934 says that a loan satisfied by an issue of shares does not give relief under section 253. Assuming share capital can be withdrawn like a loan. It needs a formal procedure. If HMRC opens a check into your return, tax investigation insurance pays your accountant's fees. Solar Protect cover pays up to £100,000 with no excess; it never pays tax, interest or penalties. Read how our cover works or get a quote.

Lending money to your company usually gives more flexibility than buying shares: the company can deduct interest it pays you, and repaying the loan is not taxed. Subscribing for shares gives no deduction for dividends and makes getting the money back slower and more formal, but if a trading company fails, a loss on subscribed shares can often be set against income, while a loss on a loan only produces a capital loss.

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What are the two options?

An owner who puts money into their own limited company can either lend it, creating a credit balance on a loan or director’s loan account, or subscribe for new shares, increasing the company’s share capital. Many owners do both: a small number of shares at the start and further funding as a loan. The choice affects how returns are taxed, how easily the money can come back out, and what relief is available if the business fails.

GOV.UK confirms that the company does not pay Corporation Tax on money its director lends it. Equally, money subscribed for shares is capital, not trading income. The differences arise afterwards.

How are returns taxed on a loan compared with shares?

Interest on a loan

The company can pay interest on a loan. GOV.UK states that this interest is a business expense for the company and personal income for the director, and that the company must pay it net of Income Tax at the basic rate of 20%, reporting and paying that tax quarterly on form CT61. The director reports the gross interest on a Self Assessment return as savings income and gets credit for the tax deducted. The government’s technical note on the Budget 2025 changes says the savings basic rate rises to 22% for 2027 to 2028 and the withholding rate on yearly interest will follow it.

Two limits apply. Under paragraph E of section 1000 of the Corporation Tax Act 2010, interest above a reasonable commercial return can be treated as a distribution. In a close company, interest owed to an individual participator that is paid late can only be deducted when paid; HMRC confirms at CFM35960 that the late interest rule still applies where the creditor is an individual. The detail is in charging interest on a loan to your company.

Dividends on shares

Shares produce dividends. Section 1305 of the Corporation Tax Act 2009 denies any deduction for a dividend or other distribution, so dividends come out of profits that have already borne Corporation Tax. For 2026 to 2027 GOV.UK gives the dividend allowance as £500, with rates of 10.75%, 35.75% and 39.35% above it. Dividends are paid to all holders of a class in proportion to their shares, whereas interest goes only to the lender, which can help when the owners have contributed unequal amounts.

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How do you get the money back?

This is often the deciding point. Repaying the principal of a loan is simply the company settling a debt, so there is nothing to tax as income or gain. The loan can be repaid in stages as cash allows, provided the company remains able to pay its other debts.

Share capital is much harder to return. Under the Companies Act 2006, a company can buy back its own shares under section 690, normally out of distributable profits or the proceeds of a fresh issue, with section 692 allowing a private company to use capital only under the Chapter 5 procedure or within a small annual limit if its articles permit. Alternatively, a private company can reduce its capital by special resolution supported by a solvency statement under section 641. These steps need resolutions, filings at Companies House and, often, professional help.

The tax treatment also differs. Paragraph B of section 1000 of the Corporation Tax Act 2010 excludes from a distribution so much as represents repayment of capital on the shares, so the amount originally subscribed can generally come back without dividend tax. Any excess paid on a buyback is a distribution unless the conditions in section 1033 for unquoted trading companies are met, including that the purchase is wholly or mainly for the benefit of the trade. See share buyback tax treatment.

What happens if the company fails?

Ranking against creditors

In a winding up, section 107 of the Insolvency Act 1986 requires the company’s property to be applied first in satisfaction of its liabilities, and only then distributed among the members. As a lender you are a creditor and may receive something; as a shareholder you receive nothing until every creditor is paid in full.

Relief for a lost loan

Section 253 of the Taxation of Chargeable Gains Act 1992 lets an individual claim an allowable capital loss when a qualifying loan to a trader becomes irrecoverable. The money must have been used wholly for the borrower’s trade, and the debt must not be a debt on a security. The loss is a capital loss, so GOV.UK’s rules on losses apply: it is set against gains of the same year and any surplus is carried forward against future gains. For an owner with no gains, it may sit unused for years. The conditions are covered in losses on loans to traders.

Relief for lost shares

Section 131 of the Income Tax Act 2007 gives share loss relief where an individual makes an allowable capital loss on shares they subscribed for in a qualifying trading company. The disposal can be a deemed disposal on a negligible value claim under section 24(2) of the 1992 Act, or a distribution in a winding up. Under section 132 the loss can be set against income of the year of the loss, the previous year or both, with the claim due by the first anniversary of the normal filing date for the year of the loss. HMRC’s helpsheet HS286 explains the qualifying trading company and gross assets conditions. The relief is within the cap in section 24A of the Income Tax Act 2007, which is the greater of £50,000 and 25% of adjusted total income. Shares bought from another shareholder do not qualify, because they were not subscribed for. See share loss relief against income.

How does this compare in numbers?

Illustration only. Ravi, a higher rate taxpayer, puts £50,000 into his trading company. Assume the company pays Corporation Tax at the 25% main rate and the business later fails with nothing left for him.

Point of comparison	£50,000 loan at 5%	£50,000 of new shares
Annual return	£2,500 interest, deductible by the company	Dividends paid from taxed profits
Corporation Tax saved by the company each year	£625	None
Tax deducted at source	£500 at 20%, paid via CT61	None
Getting the £50,000 back while trading	Repaid as a debt, no tax	Buyback or capital reduction procedure needed
If the company fails	Capital loss of £50,000, usable only against gains	Share loss relief against income, worth up to £20,000 at 40% if conditions met

Ravi’s choice depends on whether he values flexibility and a deductible return more than the protection that share loss relief gives if the business fails.

What if you borrow personally to fund the company?

If the owner borrows from a bank to put money into the company, section 392 of the Income Tax Act 2007 can give income tax relief for the interest on that personal loan where it is used to buy ordinary shares in, or lend to, a close company that is not a close investment holding company, and either the material interest conditions or the full time working conditions in section 393 are met. The relief is also subject to the section 24A cap. It works for both shares and loans, but if a claim for Enterprise Investment Scheme relief is made on the shares, section 392 relief is not available for that borrowing. See qualifying loan interest relief.

What paperwork does each route need?

Loan. A short written agreement setting out the amount, any interest rate, when interest is paid and how the loan is repaid. If interest is paid, the company must request form CT61 from HMRC.
Shares. The approvals the articles require, an update to the register of members and, under section 555 of the Companies Act 2006, a return of allotment with a statement of capital delivered to Companies House within one month. See allotting shares.

What mistakes come up most often?

Calling it a loan with no evidence. Without a record, HMRC and a liquidator may treat money put in as something else.
Paying interest without deducting tax. The company is liable for tax it should have withheld.
Buying existing shares and expecting share loss relief. Only subscribed shares qualify.
Converting a loan into shares without thinking about relief. HMRC’s guidance at CG65934 says that a loan satisfied by an issue of shares does not give relief under section 253.
Assuming share capital can be withdrawn like a loan. It needs a formal procedure.

If HMRC opens a check into your return, tax investigation insurance pays your accountant’s fees. Solar Protect cover pays up to £100,000 with no excess; it never pays tax, interest or penalties. Read how our cover works or get a quote.

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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.