Loans to Employees and Directors in the UK: Rules, Risks, and Best Practices

Offering loans to employees or directors can be a valuable tool for businesses and can help to retain talent, support personal needs, or fund business-related expenses.

However, in the UK, such arrangements are subject to strict legal, tax, and compliance rules. Mismanaging them can lead to unexpected tax liabilities, criminal offences, or unenforceable agreements.

Why Offer Loans?

Loans can serve various purposes, including the following:

• Employee retention and welfare– For example, helping staff with relocation costs, season ticket purchases, or other expenses.
• Officer support– For example, funding directors’ business-related expenses before reimbursement or assisting with personal cash flow.
• Shareholder arrangements– In owner-managed businesses, loans may be used as part of remuneration or investment strategies.

While these can be mutually beneficial, they must be structured carefully to avoid breaching tax or company law rules.

Legal Framework

• Employee loans – Loans to employees are generally a contractual matter, but employers should always put the loan terms in writing and ensure that deductions from wages for repayment comply with the Employment Rights Act 1996.
• Director loans – Under the Companies Act 2006, loans to directors are tightly regulated requiring shareholder approval for loans over £10,000. Any failure to obtain approval can make the loan voidable and may require repayment with interest.

Tax Implications

• Benefit-in-kind rules – If an employee or director receives a loan with either no interest or with interest below the HMRC official rate, then the difference between the interest charged and the official rate is treated as a taxable benefit and may trigger Class 1A National Insurance contributions.
• Corporation tax – For close companies (typically small companies controlled by five or fewer shareholders), loans to directors or shareholders that remain outstanding nine months after the end of the relevant accounting period trigger a Section 455 tax charge at 33.75% (currently) of the outstanding amount.

Write-offs and waivers – If a loan is written off, the amount is treated as income for the borrower taxable as employment income for the borrower.

Best Practices For Compliance

• Have a formal loan agreement in place.
• Seek shareholder approval where required.
• Charge a commercial interest rate to avoid benefit-in-kind charges.
• Monitor repayment schedules and keep accurate records.
• Review loans regularly to ensure they are repaid within agreed terms.
• Consult tax and legal advisers before making or altering loan arrangements including to ensure that the loan documentation is structured to be exempt from regulation under the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001.

Risks Of Getting It Wrong

• Unexpected tax bills for both the company and the borrower.
• Penalties and interest from HMRC.
• Breach of directors’ duties under company law.
• Reputational damage if arrangements appear to be disguised remuneration.

How Can We Help?

The Corporate and Commercial team at Wilson Browne Solicitors is ideally placed to advise on all legal aspects of loans to employees or directors, including the preparation of the required legally compliant loan agreements and supporting documentation. For a confidential and no obligation initial discussion about how we may be able to help, please contact the Corporate and Commercial team at 0800 088 6004.