Charging Your Company Interest on Money You Have Lent It
It is common for limited company owners to lend money to their company.
You may have used personal savings to fund start-up costs, purchase equipment, support cash flow or provide the deposit for an investment.
The company can repay the money you originally lent it without that repayment being treated as income.
But what if you also want the company to pay you interest?
That can be possible, and the interest can be tax deductible for the company. However, there are important rules around when the interest is paid, how it is recorded, tax deducted at source and how you report it personally.
The loan and the interest are different
Suppose you lend your company £100,000.
The £100,000 is money the company owes you.
When the company repays that £100,000, it is simply repaying your loan.
Interest is different.
If you charge the company interest for using your money:
For the company: the interest is normally a finance cost and may qualify for Corporation Tax relief.
For you personally: the interest is taxable savings income and must normally be reported on your Self Assessment tax return.
It is therefore important to keep the original loan balance and the interest separate in the accounting records.
Put the arrangement in writing
If you are going to charge interest, have a written loan agreement.
It should make clear:
the amount lent;
the interest rate;
when interest starts;
how the interest is calculated;
when it becomes payable;
whether unpaid interest itself earns interest;
and how and when the loan can be repaid.
This is particularly important for owner-managed companies because you are effectively dealing with the company on both sides of the transaction.
A reasonable commercial interest rate is also easier to support than an arbitrary figure chosen at the year end.
Interest accrues in the company accounts
Interest does not necessarily need to be physically paid every month for it to appear in the accounts.
For example, suppose your company owes you £100,000 and the agreement charges interest at 5% a year.
The annual interest is £5,000.
The accounts may record:
£5,000 interest expense in the Profit & Loss account
and
£5,000 interest owed on the Balance Sheet.
This is an accrual.
It reflects the cost belonging to that accounting period, even though the company has not yet transferred the money to you.
But this creates an important distinction:
Accounting for interest is not necessarily the same as paying the interest.
Accrued versus paid interest
If the interest is simply credited to an accrual or creditor account, with the director unable to withdraw it, it has generally not yet been paid.
However, if the interest is credited to your Director’s Loan Account and you are free to withdraw that money whenever you wish, that bookkeeping entry can itself amount to payment.
The courts considered this principle in Minsham Properties Ltd v Price (63 TC 570). Current guidance at CFM35830 confirms that a book entry can constitute payment where the company has the funds available and the recipient can draw on them unconditionally.
So simply moving accrued interest into your Director’s Loan Account at the year end can have tax consequences, even though no cash has moved.
Why the 12-month rule matters
There is another important rule where a close company owes interest to a shareholder or other participator.
Under sections 373 and 375 CTA 2009, if the interest is not paid within 12 months after the end of the accounting period in which it accrued, the company may have to delay the Corporation Tax deduction until the interest is actually paid.
For example, suppose your company has a 31 March 2027 year end and records £5,000 of interest in its accounts.
If the relevant rules apply, paying the interest by 31 March 2028 can allow the company to obtain the deduction for the year in which the interest originally accrued.
If it remains unpaid beyond that point, the £5,000 can still appear as an expense in the statutory accounts, but the deduction may need to be added back in the Corporation Tax computation and claimed later when payment takes place.
This is why the accounts and Corporation Tax treatment do not always match.
The company normally deducts 20% tax
When a UK company pays yearly interest to an individual, it will generally need to deduct Income Tax before paying the interest.
For 2026/27, the withholding rate is 20%.
For example, if the company pays you gross interest of £5,000:
Gross interest: £5,00020% tax deducted: £1,000Amount you receive: £4,000
The company pays the £1,000 deducted over using form CT61.
The return periods are generally based around 31 March, 30 June, 30 September and 31 December, with an additional shorter period where the company's accounting period ends between those dates.
The CT61 and tax payment are due within 14 days of the end of the relevant return period.
This is why interest should not simply be posted to the Director’s Loan Account without considering the CT61 first.
What tax do you pay personally?
The gross interest is your personal savings income.
For 2026/27, the savings income rates are:
20% for basic-rate taxpayers, 40% for higher-rate taxpayers and 45% for additional-rate taxpayers.
You may also have a Personal Savings Allowance.
For 2026/27 this is £1,000 for a basic-rate taxpayer, £500 for a higher-rate taxpayer, and nil for an additional-rate taxpayer.
The 20% deducted by the company is therefore not necessarily your final tax bill.
You report the gross interest on your Self Assessment return and receive credit for the tax already deducted.
For example, if £5,000 gross interest is paid and £1,000 has already been deducted, a higher-rate taxpayer may have additional tax to pay, while someone with unused savings allowances could potentially have too much tax deducted.
Your total income therefore matters.
There is also a future planning point: from 6 April 2027, the savings rates are legislated to increase to 22%, 42% and 47%, and the withholding rate on yearly interest will follow the savings basic rate.
Does charging interest save Corporation Tax?
Potentially, yes.
If £5,000 of interest qualifies for Corporation Tax relief, the tax saving could be:
£950 at a 19% Corporation Tax rate, or£1,250 at a 25% Corporation Tax rate.
The position can differ where Marginal Relief applies.
But remember that the director then has taxable interest income personally.
So the right comparison is not simply:
“Can the company claim the interest?”
It is:
“What is the overall company and personal tax cost?”
A common year-end mistake
A particularly easy mistake is this:
The accounts show £5,000 interest expense.
The accountant or bookkeeper posts:
Dr Interest expense £5,000Cr Director’s Loan Account £5,000
Everyone assumes the entry is simply an accounting adjustment.
But if that £5,000 is now available for the director to withdraw, the credit may amount to payment.
That can trigger:
the requirement to deduct tax;
a CT61 obligation;
personal interest income;
and the relevant Corporation Tax timing consequences.
So the treatment should be agreed before the year-end journal is posted.
Final thoughts
Charging your company interest can be perfectly legitimate and, in the right circumstances, tax efficient.
But the timing matters.
The key points are:
document the loan and interest terms properly;
record accrued interest correctly in the accounts;
understand the difference between an accrual and a payment;
remember that crediting interest to a freely available Director’s Loan Account can count as payment;
consider the 12-month rule for Corporation Tax relief;
deduct the required tax when yearly interest is paid;
file the CT61 on time;
and report the gross interest on your personal tax return.
At Busy Bee, we help limited company owners stay compliant, tax efficient and in control of their business finances.
Disclaimer: The content on this page is for general information only and should not be treated as tax, legal or financial advice. Tax planning should always be reviewed against your individual circumstances before action is taken.
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