What a director’s loan account is – and how Section 455 tax applies

A director’s loan account records money you put into your limited company and money you take out which isn’t salary, dividends or an expense repayment.

If you take out more than you put in, the account becomes overdrawn – in other words, you owe the company money.

There’s nothing unusual about this, but there are tax consequences if the balance isn’t cleared in time. In particular, your company may have to pay a Section 455 tax charge on an outstanding loan.

The key date is nine months and one day after the end of the relevant accounting period.

What is a director’s loan account?

Every limited company should keep a running record of any money a director lends to or borrows from the business. The balance of this record is your director’s loan account.

• If you put personal money into the company — for example, to cover start-up costs — the company owes you that amount.
• If you withdraw company funds for personal use, other than salary or dividends, then you owe the company.

It’s effectively a current account between you and your company. At the end of each accounting period, your accountant will show the closing DLA balance on the company’s balance sheet as either an asset or a liability.

When does a DLA become ‘overdrawn’?

As a director, if you’ve taken more money out of the company than you’ve paid in, your loan account is described as overdrawn.

HMRC treats this as a company loan to an individual, which can trigger an additional Corporation Tax charge.

Section 455 Corporation Tax charge

Under Section 455 of the Corporation Tax Act 2010, if a close company (which includes most small limited companies) makes a loan to a director or shareholder that remains outstanding nine months and one day after the accounting year end, the company may have to pay an additional Corporation Tax charge.

The Section 455 rate increased from 33.75% to 35.75% for loans made on or after 6th April 2026. The rate is linked to the dividend upper rate for the tax year in which the loan is made.

Importantly, this isn’t necessarily a permanent tax cost. If the loan is later repaid, released or written off, the company can normally claim Section 458 relief. However, the relief is not immediate, so the Section 455 payment can create a significant cash flow cost in the meantime.

An example

If your company’s year-end is 31st March 2027 and you owe the company £12,000 at that date, the loan will generally need to be cleared by 1st January 2028 to avoid an initial Section 455 charge on that amount.

For a loan made on or after 6th April 2026, a £12,000 outstanding balance would produce a potential £4,290 Section 455 charge (35.75% × £12,000).

If the loan is repaid later, the company can normally claim Section 458 relief for the amount repaid, although that relief is not available immediately.

Interest and benefit-in-kind rules

If the total balance of cheap or interest-free employment-related loans goes above £10,000, a taxable benefit in kind can arise unless sufficient interest is paid to the company.

HMRC’s official rate of interest is 3.75% from 6th April 2026, although the rate is now reviewed quarterly and can change during the tax year.

The company may also have to report the benefit and pay Class 1A National Insurance on it.

How to repay or clear a director’s loan

You can clear an overdrawn director’s loan in several ways:

• Repaying the money directly from your personal account.
• Crediting a declared dividend or salary against the balance.
• Writing it off, although this can create personal tax and National Insurance consequences.

HMRC has anti-avoidance rules aimed at so-called “bed and breakfasting” — where a director repays a loan and then takes further money from the company.

A 30-day matching rule can apply in certain circumstances, and there is a separate rule which can apply where larger amounts are repaid and there are arrangements to borrow again. If you repay a director’s loan and then take further funds from the company, ask your accountant to check the position.

How to accurately track outstanding loans

Every payment made between you and the company must be accurately recorded. This is very easy if you use accounting software, such as Xero (30-day free trial).

At year-end, your accountant will reconcile the director’s loan account as part of your annual accounts and Corporation Tax computation.

What if you can’t repay?

Writing off a director’s loan doesn’t simply make the tax problem disappear.

If a loan to a shareholder is released or written off, the amount is normally taxed on the shareholder as distribution income. Where the shareholder is also an employee or director, National Insurance consequences can also arise.

The company can normally obtain Section 458 relief from the corresponding Section 455 charge, but the personal tax and National Insurance position needs to be considered separately.

For most owner-managed companies, a loan write-off is therefore something to discuss with your accountant before taking any action.

An unresolved overdrawn loan can also cause problems if you close the company or raise a red flag during an HMRC tax investigation.

Director’s loans – some key points

• Keep clear records of all money moving between you and the company.
• Repay any loans within nine months and one day of the relevant accounting period end to avoid an initial Section 455 charge.
• For loans made on or after 6th April 2026, the Section 455 rate is 35.75%.
• Loans above £10,000 may trigger a benefit-in-kind charge.
• Be careful about repaying a loan and then borrowing again — HMRC’s anti-avoidance rules can prevent a repayment from reducing the Section 455 charge as expected.
• Speak to your accountant if unsure about repayments or how to declare a loan in your accounts.