A director's loan is money a director takes out of their company, or puts into it, that is not salary, not a dividend and not the repayment of an expense they paid personally. It is not a formal loan in the sense of paperwork and a bank; it is simply what the tax system calls any other movement between the two. Because a company is a separate legal person from the people who own it, that movement is a debt, and the tax system treats it as one.
The three things it is not
Salary is paid through payroll with income tax and national insurance deducted. A dividend is a distribution of profit, declared out of distributable reserves, taxed on the director personally at dividend rates. An expense repayment returns money the director has already spent on the company's behalf. Anything else moving between director and company is a loan, including the cash drawn in March against a dividend nobody declares until December.
Why the direction matters more than the amount
If the director owes the company at the year end, the company has a reporting obligation and possibly a tax charge. If the company owes the director, it has neither, and the only question is whether interest is paid. This asymmetry is the whole of the rule: the tax system is concerned with value leaving a company without being taxed as pay or as profit, and is indifferent to a director funding their own business.
The two figures worth remembering
Nine months after the end of the accounting period is when an overdrawn balance stops being reportable and starts being payable. Thirty-three point seven five per cent of the outstanding balance is what the company pays if it is still there. Separately, a loan of more than £10,000 at any point in the tax year is a benefit in kind on the director unless interest is charged at HMRC's official rate, which is a personal tax question rather than a company one and is reported on a P11D.
Questions people ask about what is a directors loan
What counts as a director's loan?
Any money moving between a director and the company that is not salary, a dividend or the repayment of an expense the director paid personally. Cash drawn against an undeclared dividend is the most common example.
Is a director's loan illegal?
No. It is an ordinary and lawful transaction between a company and its director. It carries a reporting obligation, a possible corporation tax charge if it is overdrawn nine months after the year end, and company law approval requirements above certain amounts.
How much can a director borrow from their company?
There is no tax ceiling, but two thresholds change the treatment: over £10,000 at any point in the tax year creates a benefit in kind unless interest is charged at the official rate, and company law generally requires shareholder approval above £10,000.