Answers · UK 2025/26
What interest rate must be charged on a director's loan in the UK to avoid a benefit in kind?
HMRC's official rate of interest (ORI) must be charged to avoid a benefit in kind. The rate is set quarterly by HMRC -- it was 2.25% in 2024/25. If the company charges at least the ORI on the outstanding loan balance, no benefit in kind arises for the director.
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A director's loan account (DLA) records money lent to or borrowed from the company by a director. If the company lends money to a director at below HMRC's official rate of interest (ORI), the shortfall is treated as a benefit in kind. HMRC's Official Rate of Interest (ORI): - The ORI is set by HMRC each April and can change quarterly. - For 2024/25 the ORI was 2.25%. Check HMRC's current published rate for 2026/27 on GOV.UK. - If the company charges the director at least this rate on the outstanding loan balance, no benefit in kind arises. What happens if interest charged is below ORI: - The shortfall in interest is a benefit in kind (a "cheap loan" benefit). - The director must pay income tax on the shortfall at their marginal rate. - The company must report the benefit on the P11D and pay Class 1A NI at 15% (from April 2025) on the benefit value. Small loans exemption: - If the total loans from the company to the director do not exceed £10,000 at any point during the tax year, no benefit in kind arises regardless of interest rate. Section 455 tax (Corporation Tax Act 2010): - If a loan to a director is outstanding more than 9 months after the company's accounting period ends, the company must pay Section 455 tax to HMRC at 33.75% of the outstanding balance. - This is a temporary tax -- repaid to the company once the director repays the loan. Best practice: - Set interest at or above the ORI each year. - Document the loan and interest in board minutes. - Reconcile DLA balances at year end with your accountant.
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This answer is informational only and does not constitute financial, tax or legal advice. Figures are for the 2025/26 UK tax year. See our methodology and sources.