Putting your own money into your company: loan or share capital?

Almost every owner-managed company in the UK has been funded, at some point, by a transfer from the founder's personal account. The card machine settlement was late, the VAT bill was due, so £8,000 went across and nobody wrote anything down. Six years later there is a five-figure balance sitting on the balance sheet that nobody can fully explain, and the question of what it actually is only surfaces when a lender, a buyer or an investor asks.

The money can go in one of two ways: as a loan to the company, or as share capital. The transfer looks identical from your banking app. Legally and for tax they behave nothing alike, and the difference is worth thousands of pounds at the point you want the money back.

What actually happens to the money

First, the reassuring part. Money you put into your own company is not income for the company and is not taxed on the way in, whichever route you use. You are not making the company richer in profit terms; you are financing it. Nothing on the corporation tax return changes because you funded a cash gap.

What changes is what the company owes you afterwards. If it is a loan, the company owes you a debt, and repaying a debt is not a taxable event for anybody. If it is share capital, you own a bigger slice of a company, and getting cash back out of share capital is a formal legal process rather than a bank transfer.

The case for a loan

For most small companies, a director's loan is the right default, and the reason is simple: you can take it back out again whenever the company can afford it, with no tax at all. It is a repayment of your own capital, not a reward for anything, so there is no income tax, no dividend tax and no National Insurance on it.

This is a much bigger deal than it sounds. Suppose you put in £40,000 over three difficult years and the company later has the cash to repay you. Taking that £40,000 back as loan repayment costs you nothing. Taking the same £40,000 out as dividends instead, at the 2026/27 basic rate of 10.75% after the £500 dividend allowance, costs about £4,250 in personal tax, and if it pushes you into the higher band at 35.75% it is several times that. Same cash, same company, very different outcome, decided years earlier by a bookkeeping treatment nobody discussed.

A director's loan is the only route by which cash leaves an owner-managed company completely untaxed, and most owners spend theirs without realising they had it.

The practical requirement is that the loan is documented and identifiable. A short written loan agreement, a distinct entry in the accounts, and the money moving between your personal account and the company account rather than being netted against expenses. If your director's loan account is a soup of personal spending, business costs paid on a personal card and cash withdrawals, you will struggle to prove what is genuinely owed back to you.

Note that this is the healthy direction of travel. A director's loan account that goes the other way, where the company has lent you money, triggers a separate and much less friendly regime. Director's loan account: what it really costs covers that side.

The case for share capital

Share capital is permanent money. Once you have subscribed for shares, the cash belongs to the company and there is no casual way to take it back. Returning it means a formal reduction of capital supported by a solvency statement, a purchase of own shares, or eventually a liquidation. All of those are doable, none of them is a Tuesday afternoon bank transfer.

So why would anybody choose it? Three reasons. It strengthens the balance sheet in a way lenders and credit reference agencies respond to, because equity absorbs losses while a director's loan is just another creditor. It sets your shareholding, which matters if there is more than one of you and the money going in is not proportionate to the shares. And if you are heading towards outside investment, investors expect founder money to be equity; they are generally unimpressed to find their round would immediately repay your loan, and the investment documents will usually block exactly that.

In practice many companies do both: a nominal share capital, and the working money in as a loan.

Charging interest, and the CT61 nobody expects

You are allowed to charge your company interest on your loan, at a commercial rate, and it can be genuinely efficient. The company gets a corporation tax deduction for the interest, at 19% on profits up to £50,000 and 25% above £250,000, with an effective 26.5% on the band in between. You receive interest, not a dividend, which means your personal savings allowance of £1,000 for a basic rate taxpayer or £500 for a higher rate taxpayer can cover some or all of it.

The catch is administrative and it surprises almost everyone. When a company pays interest to an individual it must deduct basic rate income tax at 20% from the payment, hand that to HMRC, and report it quarterly on form CT61. The quarters end on 31 March, 30 June, 30 September and 31 December, and the return and payment are due within 14 days of each quarter end. You then declare the gross interest on your Self Assessment return and claim credit for the 20% already deducted.

A worked example

The figures below are illustrative, but the shape of the answer holds for most small companies.

You have lent your company £40,000 and the company makes modest profits, taxed at 19%. You charge 5% interest, so £2,000 a year. The company deducts £400 and pays you £1,600, files a CT61 for that quarter, and pays the £400 to HMRC. The £2,000 reduces the company's taxable profit, saving £380 of corporation tax. On your side, £1,000 is covered by the personal savings allowance and the other £1,000 is taxed at 20%, so £200. Total tax across you and the company on that £2,000: £200, less the £380 the company saved. You are £180 ahead.

Now take the same £2,000 as a dividend. Dividends come out of profit after corporation tax, so the company needs roughly £2,469 of pre-tax profit to pay it. You pay 10.75% on it above the dividend allowance. There is no corporation tax deduction at all. On these numbers the interest route is better by roughly £340 a year, and the gap widens if the company pays tax at 25%.

None of which changes the main point: the £40,000 itself comes back to you tax free either way, because it is loan capital. The interest is a small optimisation on top of a large one.

What happens if it all goes wrong

This is the part worth understanding before you choose, because the two routes give you very different reliefs if the company fails.

Money subscribed for ordinary shares in an unquoted trading company that becomes worthless can qualify for share loss relief, which is unusually generous because it can be set against your income rather than only against capital gains. An irrecoverable loan to a trading company gives you a capital loss instead, which is only usable against capital gains, and many owner-managers do not have any.

So the honest summary is that a loan is better while the company survives and share capital can be better if it does not. Given most people are not planning for failure, the loan usually still wins, but it is worth knowing that the flexible option is not free of downside.

One more thing lenders do: if you borrow from a bank, expect to be asked to subordinate your director's loan, which means agreeing not to repay yourself while their debt is outstanding. That is normal and negotiable in its details, but it means your loan is less liquid than it looks. What a lender actually asks for before they approve a loan sets out the rest of the pack.

What to do this week

Pull the director's loan account balance out of your last set of accounts and ask whether you can explain it. If it is a credit balance in your favour, that is money the company owes you and can repay tax free, which is often the cheapest cash you will ever take out of the business.

Then write the agreement you never wrote: amount, whether interest is charged, and on what notice it is repayable. Two pages is plenty. If you decide to charge interest, set a diary reminder for 14 April, 14 July, 14 October and 14 January so the CT61 does not catch you out. And if you are planning to raise money, talk to whoever is advising you before you put the next tranche in, because converting a loan to equity later is straightforward while pulling equity back out is not.

For the wider question of how you take money out once the company is profitable, salary and dividends: how directors actually pay themselves picks up where this leaves off.

Common questions

Do I pay tax when I lend my own company money?

No. Transferring your own money into your company is not income for the company and not a taxable event for you, whether it goes in as a loan or as share capital. The company simply records that it owes you the money, or that you have subscribed for shares. Tax only becomes relevant on the way back out, and that is where the two routes diverge sharply: repaying a director's loan is tax free because it returns your own capital, while extracting share capital requires a formal legal process. If you charge the company interest on the loan, that interest is taxable income for you and is reported separately.

Can I charge my company interest on my director's loan?

Yes, at a commercial rate and ideally under a written loan agreement. The interest is deductible for the company against corporation tax, which is 19% on profits up to £50,000 and 25% above £250,000. The administrative catch is that the company must deduct income tax at 20% from the interest before paying you, then report and pay that to HMRC on form CT61 within 14 days of each quarter end on 31 March, 30 June, 30 September and 31 December. You declare the gross interest on your Self Assessment and claim credit for the tax already deducted. Your personal savings allowance may cover part of it.

Should I put money in as a loan or as shares if I might raise investment later?

Investors generally expect founder money to sit as equity rather than debt, because a round that immediately repays a founder loan funds your exit rather than the company's growth. Most investment documents restrict repaying shareholder loans without consent, so the loan does not disappear but it stops being liquid. A common compromise is to fund as a loan while you are self-financed, then convert the loan to shares as part of the funding round, which is straightforward and is often welcomed because it cleans up the balance sheet. Converting the other way, pulling equity back out, is far harder, so the loan preserves your options for longer.

What happens to my director's loan if the company goes under?

You become an unsecured creditor, which in practice means you rank behind secured lenders, employees and HMRC, and usually recover little or nothing. For tax, an irrecoverable loan to a trading company can produce a capital loss, which is only usable against capital gains. Money you subscribed for ordinary shares in an unquoted trading company can qualify for share loss relief instead, which can be set against your income and is therefore more valuable to most owner-managers. That asymmetry is the one real argument for putting at least some of your funding in as equity rather than lending all of it.