An overdrawn director's loan account is one of the most common issues we find when we take on a new client, and one of the most expensive to leave unmanaged. From 6 April 2026, the tax charge that applies to loans left unpaid for too long, known as the Section 455 charge, rose from 33.75% to 35.75%, making this an even more costly area to get wrong.

Disclaimer: This article is for general information only and reflects HMRC guidance and tax rates confirmed for the 2026/27 tax year at the time of writing. Every company's circumstances are different, and the interaction between director's loan accounts, insolvency and personal tax can be complex. Always seek specific advice tailored to your own position.

This article explains what a director's loan account actually is, how the Section 455 charge works, the separate benefit in kind rules that can apply, and the anti avoidance rules designed to stop directors gaming the system by repaying and redrawing loans.

What a Director's Loan Account Actually Is

A director's loan account, usually shortened to a DLA, is simply a running record of money moving between a director and their company that is not salary, dividends, or the reimbursement of a genuine business expense. If a director takes money out of the company for personal use, perhaps to cover a personal bill or a large one off purchase, and that amount has not been formally declared as salary or dividend, it goes into the loan account as a debt owed to the company.

Many directors do not set out to create a director's loan deliberately. It often builds up gradually, through company card spending that turns out to be personal, informal drawings taken during the year ahead of a dividend being formally declared, or personal expenses accidentally paid from the business account. Left unreviewed, these small amounts can accumulate into a significant overdrawn balance by the time the accounts are prepared.

The Section 455 Charge, and the 2026/27 Rate Rise

Where a company is a close company, broadly one controlled by five or fewer people, and a director's loan account remains overdrawn nine months and one day after the end of the accounting period in which the loan was made, the company must pay a tax charge under Section 455 of the Corporation Tax Act 2010. This is paid alongside Corporation Tax, reported on the CT600A supplement, and is calculated on the outstanding balance at the end of the accounting period.

The rate of this charge is tied to the higher rate of dividend tax, reflecting the fact that an unpaid loan is economically similar to a dividend the director has not actually declared. Following the dividend tax rise confirmed at the Autumn 2025 Budget, the Section 455 rate increased from 33.75% to 35.75% for loans made on or after 6 April 2026. Loans made before that date remain subject to the earlier 33.75% rate even if they are still outstanding now, so a company with older loans on its books may be paying two different rates depending on exactly when each amount was drawn.

The good news is that Section 455 tax is not a permanent cost. It is repayable once the loan itself is repaid, released, or written off, though the timing of that refund lags well behind the repayment itself, which is where the real cash flow cost of this charge tends to bite.

Worked Example 1: A Straightforward S455 Charge

Meridian Fit Ltd has an accounting period ending 31 March each year. Its director, Sarah, takes a loan of £25,000 from the company in June 2026 to cover a personal property deposit. By the year end of 31 March 2027, the loan remains fully outstanding. The deadline to repay it and avoid Section 455 tax is nine months and one day after the year end, which is 1 January 2028.

Sarah does not repay the loan by that date. Meridian Fit Ltd must therefore pay Section 455 tax of £25,000 multiplied by 35.75%, which comes to £8,937.50, due to HMRC on 1 January 2028 alongside its Corporation Tax for the year.

If Sarah later repays the loan in full in August 2027, the company becomes entitled to reclaim the £8,937.50, but not immediately. The refund becomes due nine months and one day after the end of the accounting period in which the repayment happened, which in this case is the year ending 31 March 2028, making the refund due date 1 January 2029. A formal claim must be submitted to HMRC. It is not issued automatically, and claims must generally be made within four years of the end of the relevant accounting period.

The Separate Benefit in Kind Charge on Larger Loans

Section 455 is not the only tax consequence of a director's loan. Where the loan, or the combined total of all loans to that director, exceeds £10,000 at any point during the tax year, and no interest is charged, or interest is charged below HMRC's official rate, a separate benefit in kind charge can arise under the employment related loans rules.

The taxable benefit is calculated by applying HMRC's official rate of interest to the average amount outstanding during the tax year. At the time of writing this rate stands at 3.75%, though it is now reviewed quarterly rather than fixed for the whole tax year, so it is worth checking the current figure before relying on it for a calculation. The resulting notional interest is added to the director's employment income and taxed at their marginal rate, and the company must also pay Class 1A National Insurance, currently 15%, on the value of the benefit, reported through the P11D process.

Crucially, this £10,000 threshold works entirely separately from Section 455. A loan can be too small to trigger the benefit in kind charge but still be caught by Section 455 if it remains outstanding for long enough, and equally a loan can be repaid well within the nine month window, avoiding Section 455 completely, while still triggering a benefit in kind charge for the period it was outstanding during the tax year.

Worked Example 2: The Benefit in Kind on an Interest Free Loan

Daniel is a director of Oakview Consulting Ltd and has an interest free loan from the company averaging £18,000 outstanding across the 2026/27 tax year. Because this exceeds the £10,000 threshold, a benefit in kind arises. Applying the official rate of 3.75% to the average balance gives a notional interest figure of £675 for the year.

This £675 is added to Daniel's employment income and taxed at his marginal rate. As a higher rate taxpayer, this costs him £270 in additional Income Tax. The company must also pay Class 1A National Insurance on the £675 benefit, at 15%, coming to just over £101. Had Daniel charged himself interest at 3.75% or more on the loan and actually paid it to the company, no benefit in kind would have arisen at all.

The Bed and Breakfasting Anti Avoidance Rules

HMRC is well aware that a director facing an approaching nine month deadline might be tempted to repay the loan just before the deadline, avoiding Section 455, and then simply draw the money straight back out again once the pressure is off. Specific anti avoidance rules exist to catch exactly this pattern, generally referred to as the bed and breakfasting rules.

Where £5,000 or more is repaid and then a new loan or withdrawal of £5,000 or more is taken within 30 days of that repayment, HMRC can disregard the repayment for Section 455 purposes and treat the original loan as though it had never been repaid at all. A separate, broader rule can also apply where the intention from the outset was to redraw a loan of £15,000 or more after a longer gap, even outside the strict 30 day window, if arrangements to that effect existed at the time of repayment.

Worked Example 3: A Repayment Caught by the 30 Day Rule

Priya's company has an overdrawn loan of £20,000 as the nine month deadline approaches. To avoid the Section 455 charge, she transfers £20,000 of personal savings into the company just before the deadline, clearing the loan account. Three weeks later, once the immediate pressure has passed, she draws £20,000 back out of the company for the same purpose the original loan was used for.

Because the redraw happened within 30 days of the repayment and both amounts exceed £5,000, HMRC will disregard the repayment entirely for Section 455 purposes. The company remains liable for the Section 455 charge as though the original loan had simply continued uninterrupted, and the temporary repayment achieves nothing beyond the cost and inconvenience of moving the money twice.

What This Means in Practice

The safest way to avoid all of this is straightforward, even if it is not always easy in practice. Genuinely repay any loan in full within nine months of the end of the accounting period in which it was taken, ideally well before that deadline to allow time for the paperwork to be sorted, and avoid the temptation to bridge a repayment with a short term injection of funds that will simply be drawn straight back out.

Where a loan genuinely cannot be repaid on that timescale, it is often better to formally declare a dividend or bonus to clear the balance, provided the company has sufficient distributable profits to support a dividend, rather than to attempt a repayment that is not really a repayment at all. Our guide on calculating dividends correctly and avoiding illegal dividends explains how to check this properly before a dividend is declared.

Frequently Asked Questions

Does Section 455 apply to loans under £10,000?

Yes. The £10,000 figure is only relevant to the separate benefit in kind charge on interest free or low interest loans. Section 455 can apply to any overdrawn director's loan account balance, however small, once it remains outstanding nine months and one day after the end of the accounting period.

Can I just write off the loan instead of repaying it?

A company can write off a director's loan, and this does stop the debt continuing to sit on the books, but it is not a tax free way out. Writing off a loan to a director who is also a shareholder is generally treated for tax purposes as a distribution, taxed on the director personally at dividend rates, even though no cash dividend has actually been paid. Any Section 455 tax already paid on the loan can normally still be reclaimed once it is written off. Given the personal tax consequences, this route needs proper advice before it is used.

Does Section 455 apply to sole traders or partnerships?

No. Section 455 only applies to close companies lending money to their directors or other participators. Sole traders and partnerships do not have a separate legal identity from their owner in the same way, so the concept of a loan from the business to its owner in this sense does not arise in the same form.

What happens to an overdrawn director's loan if the company becomes insolvent?

An overdrawn director's loan account becomes an asset of the company that a liquidator is obliged to pursue on behalf of creditors. In practice this means the director can be personally required to repay the full outstanding balance to the insolvent estate, regardless of any Section 455 tax already paid by the company. This is one of the most serious practical risks of letting a loan account run out of control, and it is worth reviewing regularly rather than only at the year end.

If I charge myself interest on the loan, does that help?

Charging interest at or above HMRC's official rate avoids the benefit in kind charge, provided the interest is actually paid to the company, not just recorded on paper. It does not affect Section 455 at all, since that charge is based purely on whether the capital balance is repaid within the nine month window, regardless of any interest charged on it.

Is the Section 455 charge the same as an underpaid dividend penalty?

No, they are different things, though they often arise from the same underlying problem. Section 455 is a temporary Corporation Tax charge on the company, refundable once the loan is repaid. An illegal or unlawful dividend, paid without sufficient distributable profits to support it, is a separate legal issue that can see the payment reclassified as a loan in the first place, at which point Section 455 can then apply to it as well.

How does HMRC know about my director's loan account?

Director's loan account balances must be disclosed in the company's statutory accounts and Corporation Tax return, so HMRC has visibility of the position every year through the normal filing process. This is not a hidden or informal arrangement, and inconsistent or missing disclosures are a common trigger for HMRC enquiries.

What CoreAcc Accountants Can Help You With

Director's loan accounts are one of the areas we review most closely for our clients, precisely because small, informal drawings during the year can quietly build into a significant overdrawn balance without anyone noticing until the accounts are prepared. CoreAcc Accountants monitors your loan account throughout the year, not just at the year end, calculates any Section 455 or benefit in kind exposure well ahead of the relevant deadlines, and helps structure repayments, dividends or salary adjustments to clear balances properly rather than through arrangements that HMRC's anti avoidance rules would simply unwind.

Get in Touch

If you are not sure whether your director's loan account is heading towards an overdrawn position, or you already know it is and want to deal with it properly before the nine month deadline arrives, contact CoreAcc Accountants and we will review your position and set out the most efficient way to clear it.

CoreAcc Accountants is an ACCA accredited firm of Chartered Certified Accountants based in Borehamwood, Hertfordshire. This article was published in September 2026 and reflects tax rates and HMRC guidance confirmed for the 2026/27 tax year at the time of writing. It does not constitute professional or legal advice. Always seek specific advice tailored to your individual circumstances.

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