A director who has lent money to their own company can charge it interest, and the company can usually deduct that interest for Corporation Tax. Because the payer is a company, it must normally deduct Income Tax at the savings basic rate (20% for payments made in 2026 to 2027) and pay it to HMRC using form CT61, and the director then reports the gross interest as savings income, with credit for the tax already taken off.

Why would a director charge their company interest?

Many owner managed companies are funded partly by the director. That might be money paid in to start the business, dividends or salary left undrawn, or expenses paid personally and never reimbursed. Each of these leaves the director’s loan account in credit: the company owes the director money. The account itself is explained in directors’ loan accounts; this page deals only with the case where the company owes the director, not the reverse.

Nothing in tax law requires a director to charge interest on a credit balance, but there are reasons to do so. Interest is a cost the company can normally deduct, it is taxed on the director as savings income rather than as earnings, and savings income is not subject to National Insurance contributions. Interest can also use allowances the director might otherwise waste, such as the starting rate for savings and the Personal Savings Allowance. The arrangement should be documented: a short written loan agreement setting the rate, when interest is payable and whether it can be rolled up makes the position much easier to defend.

Can the company deduct the interest?

For a company, interest on money it borrows is dealt with under the loan relationships rules in Part 5 of the Corporation Tax Act 2009. As a general rule the deduction follows the accounts, so the company gets relief as the interest accrues rather than when it is paid.

There is an important exception for close companies. Under the late interest rule in section 373, applied by section 375 to a close company borrowing from a participator, the deduction is deferred if the interest is not paid within 12 months of the end of the accounting period in which it accrued and the lender is not taxed on it under the loan relationships rules. HMRC’s Corporate Finance Manual at CFM35960 confirms that the 2009 changes, which removed most company lenders from the rule, have no effect where the creditor is an individual. A director shareholder lending to their own close company is exactly the case the rule still catches. The interest then becomes deductible only in the period in which it is actually paid. See close company rules for what makes a company close and who counts as a participator.

Does crediting the director’s loan account count as paying the interest?

Sometimes. HMRC’s guidance at CFM35830, drawing on Minsham Properties v Price, says a book entry counts as payment only if the company has enough funds available and the recipient is free to draw on them unconditionally. Simply rolling interest up into the loan is not payment: SAIM9100 explains that capitalising interest does not trigger the duty to deduct tax, which arises only when the interest is finally paid.

What rate of interest can you charge?

There is no statutory rate for director loans. The test is commercial. Section 1000(1) paragraph E of the Corporation Tax Act 2010 treats as a distribution any interest that represents more than a reasonable commercial return for the use of the money. HMRC’s Company Taxation Manual at CTM15500 makes clear that only the excessive element is caught. That element is then treated like a dividend: section 1305 of the Corporation Tax Act 2009 denies a deduction for distributions, and SAIM9010 notes that no Income Tax is deducted at source from interest treated as a distribution.

In practice, a director should be able to show why the rate chosen is one an unconnected lender might have asked for a similar unsecured loan to a company of that size and risk, and keep a note of the evidence at the time the rate was set.

Does the company have to deduct tax from the interest?

Usually yes. Section 874 of the Income Tax Act 2007 requires a company paying yearly interest arising in the UK to deduct a sum representing Income Tax at the savings basic rate in force for the tax year in which the payment is made. Companies do not have to deduct tax from interest paid to most other UK companies, but a payment to an individual director is squarely within the rule.

The duty applies to yearly interest, not short interest. There is no statutory definition. HMRC’s guidance at SAIM9075 explains that interest on a loan intended to last less than a year is presumed to be short, but a loan with a measure of permanence, in the nature of an investment, produces yearly interest even if it is repayable on demand (Corinthian Securities Ltd v Cato). A director’s credit balance that sits in the company for years will normally produce yearly interest.

For 2026 to 2027 the savings basic rate is 20%. The government’s technical note on the Budget 2025 changes confirms that the savings basic rate rises to 22% from 6 April 2027 and that withholding tax on yearly interest will follow the savings basic rate, so interest paid on or after that date will need 22% deducted.

How does the company report and pay the tax deducted?

The company reports the tax on form CT61, which cannot be downloaded and must be requested from HMRC online. Under section 947 of the Income Tax Act 2007, as explained at CTM35110, each return period is up to three months long and ends on 31 March, 30 June, 30 September, 31 December or the end of the company’s accounting period. A return is needed for any period in which a payment is made. CTM35110 and CTM35120 confirm that the return and the tax are both due within 14 days of the end of the return period.

If the director asks in writing, section 975 of the Income Tax Act 2007 requires the company to give a written statement showing the gross interest, the tax deducted and the amount actually paid. It is good practice to provide one every time, because the director needs those figures for their tax return.

How is the director taxed on the interest?

The director is charged on the full gross interest as savings income under section 369 of the Income Tax (Trading and Other Income) Act 2005. Interest is taxed when it arises, which HMRC’s guidance at SAIM2440 explains means when it is received or credited to an account the person is free to draw on. Interest that is rolled up and not available is not taxed until it is paid. The timing rules are compared in when income is taxed.

The tax deducted by the company is treated as tax paid by the director under section 848 of the Income Tax Act 2007, so it is credited against the final liability. Whether more is due depends on the director’s other income. The starting rate for savings of up to £5,000 and the Personal Savings Allowance of £1,000 for basic rate and £500 for higher rate taxpayers can both apply, and the way they interact with salary and dividends is set out in how savings and dividend income stack and the Personal Savings Allowance.

What does this look like in numbers?

Illustration only. Sam has a £40,000 credit balance on her director’s loan account. The company agrees in writing to pay 5% a year, payable each 31 March, and has the cash to pay it.

Step Amount
Gross interest for the year £2,000
Income Tax deducted at 20% £400
Net amount paid to Sam £1,600
Tax paid to HMRC on the CT61 for the period ending 31 March, due by 14 April £400

The company deducts £2,000 in its Corporation Tax computation because the interest is paid well within 12 months of its year end. Sam takes a salary equal to the £12,570 Personal Allowance, so none of her starting rate for savings has been used. Her £2,000 of interest falls within the £5,000 starting rate band and is taxed at 0%. On her tax return she reports £2,000 gross and the £400 deducted, which is credited against her liability.

What mistakes come up most often?

  • Paying interest gross. The company remains liable for tax it should have deducted, and CTM35150 confirms HMRC can assess the company for unpaid CT61 tax.
  • Accruing interest that is never paid. In a close company, interest owed to a participator and unpaid 12 months after the year end is not deductible until paid.
  • Treating a book entry as payment when the company has no cash. A credit to the loan account is payment only if the director could actually draw the money.
  • Setting a rate with no commercial basis. The excess over a reasonable commercial return is a distribution, not interest.
  • Forgetting the director’s return. The director must report the gross interest; if they are not already in Self Assessment, HMRC’s guidance at SAIM2010 says a new source of untaxed interest must be notified by 5 October after the tax year, and who needs to file a tax return explains when a return is required.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.