A quick note: this article is general information, not personal advice. Tax and accounting rules change and everyone's situation is different, so please don't act on anything here without checking how it applies to you. We'd be happy to help — get in touch before making any decisions.
Quick answer
If the total balance on an employee or director's relevant beneficial loans exceeds £10,000 at any time during the tax year, the small-loan exemption generally stops applying. An interest-free or low-interest loan can then create a taxable benefit in kind, with Income Tax for the director and normally Class 1A National Insurance for the company.
At a glance
- The test is whether the total relevant balance exceeds £10,000 at any time, not merely the year-end balance.
- £10,000 is an exemption threshold, not a £10,000 tax-free slice of a larger loan.
- HMRC's official rate is 3.75% from 6 April 2026, subject to quarterly review.
- Paying sufficient genuine interest to the company can reduce or eliminate the taxable benefit.
- The beneficial-loan rules are separate from section 455; both can apply to the same loan.
What is the £10,000 director's loan rule?
The rule is the small-loan exemption within the employment-related beneficial-loan legislation. HMRC says no tax is chargeable under this exemption if the total balance outstanding on all relevant beneficial loans does not exceed £10,000 throughout the tax year.
That means a DLA can be £9,500 overdrawn all year and potentially remain within the exemption, but if the relevant aggregate balance rises above £10,000 — even temporarily — the exemption can be lost for that tax year.
For the broader context of what a director's loan account is and why it matters, read our Director's Loan Accounts Explained guide.
Is only the amount above £10,000 taxable?
No. This is a common misunderstanding. The £10,000 threshold is not equivalent to a personal allowance where the first £10,000 is ignored. Once the relevant loans exceed the threshold, the beneficial-loan calculation can apply by reference to the relevant loan balance — not just the excess.
How is the taxable benefit calculated?
Broadly, the cash equivalent is the difference between:
- interest calculated using HMRC's appropriate official rate; and
- interest actually paid by the borrower for the tax year.
There are normal averaging and precise methods, and an in-year rate change can affect the detailed calculation.
Simple illustration
Assume an interest-free £20,000 loan is outstanding throughout a period for which the official rate is 3.75% (ignoring detailed averaging issues solely for illustration):
£20,000 × 3.75% = £750
A taxable benefit in the region of £750 could arise. The director is taxed on the benefit — not on the full £20,000 loan as employment income.
What is HMRC's official interest rate for 2026/27?
The official sterling rate is 3.75% from 6 April 2026. HMRC now reviews the official rate quarterly. Review dates during 2026/27 are 6 April, 6 July, 6 October and 6 January, so the rate can potentially change during the tax year. Do not assume the opening rate applies for the full year without checking.
What tax does the director pay?
The taxable benefit is treated as employment-related benefit income where the rules apply. The amount ultimately payable depends on the director's marginal Income Tax rate and circumstances. A higher-rate taxpayer will pay more than a basic-rate taxpayer on the same benefit figure.
What does the company pay?
Where the normal conditions are satisfied, Class 1A National Insurance arises on the taxable beneficial-loan amount. The company also has reporting obligations — the benefit must be returned on form P11D.
Can I avoid the benefit by paying interest to the company?
Potentially. If the director actually pays interest at a sufficient rate, the benefit can be reduced or eliminated. The important points are:
- the interest must be genuine;
- the amount and rate matter;
- timing of payment matters under the rules;
- paying interest does not repay the principal; and
- paying interest does not by itself prevent section 455 tax.
Do not simply make a year-end bookkeeping journal labelled "interest" and assume it has the same effect as interest actually paid.
Does section 455 also apply if the loan exceeds £10,000?
It can, but for a completely different reason. The £10,000 beneficial-loan rule relates to an employment benefit. Section 455 relates broadly to loans by a close company to shareholders/participators that remain outstanding at the relevant deadline. These are two entirely separate regimes. A £50,000 interest-free shareholder-director loan can therefore potentially create:
- an employment-related beneficial-loan charge; and
- a section 455 company tax charge.
Read: Section 455 Tax Explained: Director's Loan Rates, Deadlines and Repayment.
What we see in practice
Directors often focus on the year-end DLA balance. That can be misleading for the £10,000 exemption because the test looks at whether the relevant balance exceeded the threshold at any time during the tax year. If a director regularly transfers money in and out, good bookkeeping is essential. A year-end balance of £4,000 does not prove that the DLA never reached £25,000 six months earlier. Regular in-year monitoring — as part of good business accounting practice — is the best way to avoid surprises.
