HMRC has increased the ‘actual official rate’ for beneficial loan arrangements from 2.25% to 3.75% from 6 April 2025, the highest rate since 2014, when interest is calculated using the ‘precise method’.

However, the rate for loans repaid using the ‘averaging method’ for 2025-26 tax year has not been confirmed, currently at only 2.25%, making these loans very favourable when compared to Bank of England base rate of 4.5% and cost of commercial loans from banks.

Where a director is also a shareholder, companies can use a loan instead of a dividend, which would be taxed at up to 39.35%, allowing the director to benefit from the low interest rate.