Answers · UK 2025/26

What interest rate should I charge on a director's loan to avoid a tax charge?

HMRC publishes an official rate of interest each tax year; if a director's loan from the company charges less than this rate (or no interest), the difference is treated as a taxable benefit in kind on the director, reported via a P11D, and subject to Income Tax and Class 1A National Insurance for the company. Charging at or above HMRC's official rate avoids this benefit-in-kind charge entirely.

Last updated: 2 July 2026Last reviewed: 2 July 2026How we verify

Full answer

Director's loans -- where a company lends money to a director, rather than the more common scenario of a director lending to the company -- carry specific tax rules designed to prevent directors extracting value from their company as an interest-free or cheap loan instead of taxable salary or dividends. **The official rate of interest** HMRC sets an "official rate of interest" each tax year, used to calculate the benefit-in-kind value of cheap or interest-free loans to employees and directors. If the company charges interest at or above this official rate, there is no taxable benefit. If it charges less (including charging nothing), the difference between what was charged and what the official rate would have generated is treated as a taxable benefit in kind. **The £10,000 de minimis exemption** Loans (added together, if there is more than one) totalling £10,000 or less at any point in the tax year are generally exempt from the beneficial loan benefit-in-kind rules entirely, regardless of the interest rate charged -- this covers many smaller, occasional director loans without triggering the full reporting and tax burden. **How the benefit in kind is calculated and reported** Where the £10,000 threshold is exceeded and interest charged is below the official rate, the company must report the benefit on a P11D, the director pays Income Tax on the benefit value at their marginal rate, and the company pays Class 1A National Insurance (at the same rate as Employer NI, 15% for 2026/27) on the benefit value. **Section 455 tax charge: a completely separate issue** Separately from the benefit-in-kind interest rules, if a director's loan from a close company remains outstanding nine months after the company's accounting period end, the company must pay a Section 455 tax charge (currently aligned with the dividend upper rate, 33.75% historically, though this has moved with dividend tax rate changes) on the outstanding balance -- this charge is refundable once the loan is repaid, but represents a real, if temporary, cash cost to the company in the meantime, and directors should not assume a loan is "free" simply because interest is charged correctly. **Why directors sometimes still choose an interest-free or cheap loan** Despite the benefit-in-kind charge, a modest director's loan can still be cheaper overall than an equivalent salary or dividend extraction, particularly for short-term borrowing needs, since the benefit-in-kind tax cost is usually far lower than the combined tax on an equivalent amount of salary (Income Tax plus NI) — though the Section 455 charge and repayment timing considerations need factoring in for loans that will remain outstanding for an extended period. **Worked example** A director borrows £15,000 interest-free from their company for eight months. Using HMRC's official rate (which is set periodically and can change), the benefit-in-kind value might be calculated at a few hundred pounds for the period -- the director pays Income Tax on this modest benefit value at their marginal rate, and the company pays 15% Class 1A NI on the same figure, both considerably less than the tax cost of extracting £15,000 as salary or dividends outright. **Practical tip** If your company is considering lending money to a director, check HMRC's current official rate of interest (it is reviewed regularly and can change during a tax year), keep the loan below £10,000 where possible to avoid the reporting burden entirely, and ensure repayment happens well within nine months of the company's year end to avoid the Section 455 charge.