Can paying interest to your company save tax?

Borrowing from your company

As an owner manager, borrowing or using your company’s money for private purposes is usually a taxable benefit in kind, but there are exceptions. If the amount you owe your company doesn’t exceed £10,000 at any time, there’s no taxable benefit. In any tax year where you owe more than £10,000, even if it’s just for a day the tax charge is worked out on the whole debt and not just the excess over £10,000. It also creates a Class 1A NI liability for your company.

Example. In May 2025, Jackie, a higher rate taxpayer, borrowed £9,000 from her company, Acom Ltd. At that time her director’s loan account with Acom was in the red by £8,000. The two debts together exceed the £10,000 limit. Jackie is not required to pay any interest to Acom on the loans. The amount of taxable benefit is worked out by multiplying the average balance of the debt over the whole of the tax year, say £12,000, by HMRC’s official rate of interest (currently 3.75% per annum), i.e. £450. As well as a tax bill for Jackie, her company must pay Class 1A NI of £67 (£450 x 15%).

Reducing the tax and NI

The tax charge is reduced if you pay interest on the debt. For every £1 of interest paid the taxable benefit is reduced by the same amount. So, in our example, if Jackie paid interest of £450 to Acom, the tax and NI bill would be nil. This doesn’t appear to be cost effective because the tax saved (£180) is less than the interest payable. However, that’s not the full story. The simplest way to make good your interest is to debit your director’s loan account. This way, you don’t need to make a physical cash payment to achieve the tax saving before the deadline. For Class 1A NI purposes the making-good deadline is the 6 July that follows the end of the tax year for which you’re making good.

The big picture

If you pay interest to your company it increases the company’s income on which it must pay corporation tax (CT). You can, of course, withdraw the money you paid as interest, but this is taxable income for you. So, taking account of all these tax ins and outs, the question is will you be better off overall by paying interest? The answer depends on how you take the money, e.g. dividend or salary, and your personal tax position at the time.

Example - company’s position . Lauren, a basic rate taxpayer, owns all the shares in Acom Ltd. Her director’s loan account is in the red by £20,000 throughout 2025/26. To avoid the benefit in kind she is charged interest of £750 on which Acom pays CT of £143 (£750 x 19% - assuming the small profits rate applies) leaving £607. It pays this to Lauren as a dividend on which she pays tax at 8.75%, i.e. £53, plus, Acom saves Class 1A NI of £113 (£750 x 15%). To escape Class 1A NI, interest must be paid no later than the 6 July following the end of the tax year for which the benefit would be taxed.

Example - Lauren’s position. The £750 interest is a cost to Lauren but it is partly funded by the £607 (£554 after tax).

Overall tax and NI position. In our example, by paying interest the overall tax cost to Lauren and Acom is £196 instead of £263 had Lauren not paid the interest. Not a big saving by any means but something is better than nothing.