Thousands of UK limited company directors are overlooking a clever, HMRC-approved way to generate extra income without paying tax on it.
Here is what most people don’t realise:
- You can earn £1,000 of tax-free interest each year from your own company
- Charge interest on a director’s loan and legally extract income tax-free, claim the interest as a business expense, which cuts corporation tax at the same time
Ridgefield Consulting, a Chartered Accountancy firm based in Oxfordshire, explains If you are a director of a limited company and have personal savings sitting idle in the bank, there may be a better way to use that money. Instead of earning low returns from a savings account, you can lend funds to your own company and legally charge it interest.
Not only can this provide you with a stream of tax-free income, but your company also benefits by treating the interest as a deductible expense, helping reduce its corporation tax liability.
In UK tax planning, some allowances are well-known, such as your allowance or ISA limits, but one that often gets overlooked by business owners each year and is not fully utilised is the Personal Savings Allowance (PSA).
What is the Personal Savings Allowance (PSA)?
The PSA allows individuals to earn a certain amount of interest each year without paying tax. It applies automatically and is calculated on a tax year basis (6 April to 5 April).
The amount you’re entitled to depends on your income tax band:
- Basic rate taxpayers: Up to £1,000 of interest tax-free
- Higher rate taxpayers: Up to £500 tax-free
- Additional rate taxpayers: Do not have a PSA, and all interest earned on savings is taxable.
Although the PSA is often associated with bank accounts or ISAs, it also applies to interest earned from loans, including loans you make to your own company.
That means that interest you charge on a director’s loan counts towards your PSA and could be completely tax-free.
It is important to remember that without careful tax planning, income from interest on loans can become taxable if the tax bands’ thresholds are exceeded. If you do surpass the limit of interest you can earn tax-free, you must report it through self-assessment.
What is a Director’s Loan?
A director’s loan is when you, as a company director, lend money to your own business or your business loans money to you. It is a different way of transferring money between the business and the director compared to other methods, such as salaries, dividends or reimbursed expenses.
In either case, the transaction must be treated as a genuine loan, with accurate records. On your company’s balance sheet, a loan from you is recorded as a liability, meaning the company owes you that money.
Why Use a Director’s Loan?
Many business owners of limited companies use directors’ loans to offer a flexible way to move funds without the restrictions of traditional borrowing or the application process. If you’re both a director and a shareholder, lending money to your company can be a simple and efficient alternative to seeking external finance as well as being able to earn interest on the loan tax-free.
The interest rate you charge does not have to be in line with HMRC’s official rate, but must be deemed a commercial rate. This is usually between HMRC’s set rate and what the rate a bank may charge on savings, which could be as high as 8%. It is advisable to have supporting market data to justify the rate of interest used on the loan.
When set up correctly, your company can claim tax relief on the interest it pays you, deducting the interest from its profits and reducing its Corporation Tax liability. At the same time, if the interest you earn falls within your PSA, it could be entirely tax-free for you.
For Example:
You, as the director, loan your company £20,000 to help cover cash flow or to purchase a new asset. You agree to a 5% interest rate.
- The company agrees to pay you £1,000 in annual interest.
- The company withholds 20% (£200) and pays this to HMRC using form CT61.
- You receive £800 net but must report the full £1,000 gross interest on your Self-Assessment tax return.
- As a basic-rate taxpayer, the £1,000 falls within your Personal Savings Allowance, so HMRC will refund the £200 or offset it against your other tax liabilities.
Meanwhile, your company claims the full £1,000 as a deductible business expense, reducing its taxable profits and Corporation Tax bill.
Utilising the PSA can be a win for your business and generate tax-free income.
Key factors to keep in mind:
There are a few things to keep in mind to ensure this strategy is effective and compliant:
- The loan must be genuine, with clear terms and documentation.
- The interest rate must be commercially reasonable (not necessarily HMRC’s set rate, but justifiable)
- You must report the gross interest (before tax) on your Self-Assessment tax return — even if it’s within your PSA. Your company must withhold 20% tax on the interest paid to you and send it to HMRC using form CT61.
- If the interest falls within your PSA, HMRC will refund the tax or offset it against your other tax liabilities.
PSA is most certainly an overlooked allowance that can offer real tax efficiency, especially for director-shareholders who often rely on a mix of salary, dividends, and loans.
If you are considering lending money to your company, this strategy could allow you to extract income tax-free while benefiting your business at the same time.
Author Profile
- Passionate content creator, contributor, freelance writer and content marketing allrounder.
Latest entries
FeaturedJuly 31, 2025How Directors Can Earn £1,000 Tax-Free From Their Own Company
FeaturedMay 28, 2025Government Unveils Major Crackdown on Tax Avoidance – Up to £6.5 Billion Could Be Reclaimed by 2029
FeaturedMay 9, 2025Oxford Landlords Face Tax Hit as Furnished Holiday Let Benefits End in April 2025
FeaturedApril 28, 2025Rising Tax Pressures Push Directors to Rethink Income Strategies for the New Tax Year
