A director's loan account can look harmless on a balance sheet.
It can also become one of the most expensive small-company tax mistakes if it is not monitored properly.
For the 2026/27 tax year, the issue is more important because the Section 455 tax rate on many loans to participators has increased to 35.75% for loans made on or after 6 April 2026.
If you regularly take money from your company outside salary, dividends or reimbursed expenses, understanding your director's loan account is essential.
What is a director's loan account?
A director's loan account - often shortened to DLA - records money moving between a director and their company that is not simply salary, dividend, expense reimbursement or capital introduced.
The balance can move in either direction.
If you have paid business costs personally or introduced your own money into the company, the company may owe you money.
If you have taken more money from the company than has been credited to you through valid salary, dividends, expense claims or other amounts, you may owe the company.
That second situation is an overdrawn director's loan account.
Why does an overdrawn director's loan create a tax problem?
A limited company is legally separate from its owner.
The money in the company bank account is not automatically the director's personal money.
If a close company lends money to a shareholder or other participator and the loan remains outstanding after the relevant deadline, the company may have to pay a temporary Corporation Tax charge under Section 455.
For loans made on or after 6 April 2026, the Section 455 rate is 35.75%.
That means a £20,000 qualifying outstanding loan could create a Section 455 charge of:
£20,000 × 35.75% = £7,150
The company may later be able to reclaim that tax after the loan is repaid, released or written off in circumstances that qualify for relief - but the cash-flow impact can be substantial.
What is the 9-month rule?
For many owner-managed companies, the key deadline is 9 months and 1 day after the end of the Corporation Tax accounting period.
If the relevant loan is repaid, released or written off before that point, Section 455 tax may be avoided, subject to anti-avoidance rules and the facts of the case.
Example
A company has a 31 March 2027 year end.
The director owes the company £15,000 at 31 March 2027.
The key repayment deadline is generally 1 January 2028.
If the qualifying balance remains outstanding after that date, the company may face a Section 455 charge.
This is why reviewing the DLA only when the accounts are almost due can be dangerous. By then, there may be little time to decide how to clear the balance properly.
What counts as repaying a director's loan?
The most obvious method is physically repaying cash to the company.
But a DLA can also be reduced by amounts properly credited to the director, for example:
- a valid dividend where sufficient distributable profits exist;
- salary or bonus processed correctly through payroll;
- reimbursable business expenses owed to the director; or
- other genuine amounts the company owes the director.
The accounting entry must reflect something real.
You cannot simply relabel a personal withdrawal as a dividend if the company did not have sufficient distributable reserves to declare that dividend.
The £10,000 benefit-in-kind trap
Section 455 is not the only issue.
Where a director's loan exceeds £10,000 at any point in the tax year, and the director does not pay sufficient interest at HMRC's official rate, a beneficial loan benefit in kind may arise.
That can create:
- an Income Tax charge for the director; and
- Class 1A National Insurance for the company.
So a loan may create a personal tax cost even if it is repaid in time to avoid Section 455.
This catches directors who focus only on the year-end balance.
Imagine the loan reaches £18,000 in July but is reduced to £8,000 by March.
Looking only at the March balance could miss the fact that the loan exceeded £10,000 during the year.
Can the director simply pay interest?
Paying interest at least at the relevant official rate can prevent or reduce the beneficial-loan charge, depending on how the arrangement is structured and the timing of payment.
However, the interest itself becomes company income and should be recorded properly.
This is an area where the company and director should agree the approach before year end rather than reconstructing it after the event.
Beware of 'repay and redraw'
HMRC has anti-avoidance rules designed to stop directors temporarily repaying a loan around the deadline and then taking the money back shortly afterwards.
One commonly encountered rule can apply where repayments of more than £5,000 are matched by new loans of £5,000 or more within a 30-day period.
There are also rules that can apply to larger balances where arrangements already exist for the money to be borrowed again.
So this strategy:
repay the loan on Friday → clear the accounting balance → withdraw it again next week
may not achieve the tax result you expect.
The substance of the transactions matters.
What happens when Section 455 tax has already been paid?
Section 455 is designed as a temporary tax charge rather than necessarily a permanent one.
Where the loan is later repaid, released or written off, the company may be able to claim relief from the Section 455 charge.
But the repayment of tax is not immediate.
There is a statutory timing mechanism, and the company needs to make the appropriate claim.
That creates an important commercial point:
Even recoverable tax can hurt cash flow.
If the company pays £10,000 of Section 455 tax and cannot reclaim it for some time, that is £10,000 unavailable for payroll, suppliers, investment or dividends.
Loan written off does not mean tax disappears
Writing off an overdrawn director's loan can have tax consequences for the director and the company.
Depending on the circumstances, the amount can be treated as income for the shareholder/director and National Insurance implications may also arise.
Writing off the balance is therefore not a free way to make the problem disappear.
It should be modelled before the decision is made.
Director's loan vs dividend: what is the difference?
A dividend is a formal distribution of profits to a shareholder.
A director's loan is money owed between the director and the company.
The distinction matters because a dividend requires sufficient distributable reserves and should be properly declared and documented.
If the company does not have those reserves, a withdrawal cannot be made valid simply by calling it a dividend in Xero or at year end.
For owner-managed businesses, a clean process is to decide in advance how the director will be paid:
salary + properly declared dividends + reimbursed expenses
with the DLA used only where genuinely necessary.
A worked example
Suppose Anna Ltd has a 31 March 2027 year end.
During the year, the shareholder-director draws £3,000 per month from the company bank account in addition to a small payroll salary.
At year end, after valid dividends and expenses are posted, the DLA is still overdrawn by £24,000.
If the full balance remains outstanding beyond the Section 455 deadline, a 35.75% charge could be:
£24,000 × 35.75% = £8,580
If the loan also exceeded £10,000 during the tax year without sufficient interest being paid, there may separately be a beneficial-loan issue.
This is why "I'll sort the drawings out when the accounts are done" can become expensive.
How to keep a director's loan account under control
1. Stop treating every bank withdrawal as pay
Decide what is salary, what is dividend, what is an expense repayment and what is genuinely a loan.
2. Review the DLA monthly or quarterly
If the balance starts growing, deal with it before the year end.
3. Check distributable profits before declaring dividends
Cash in the bank is not the same as profit available for distribution.
4. Monitor the £10,000 threshold during the year
Do not rely solely on the year-end balance.
5. Put the 9-month deadline in the finance calendar
The Section 455 deadline should not be discovered when the Corporation Tax return is being finalised.
6. Model repayment options before acting
Cash repayment, salary, bonus and dividend can have very different tax and cash-flow consequences.
The Solutio approach
A director's loan account is not inherently bad.
It is simply an account recording money moving between two separate legal parties: you and your company.
The problem starts when the director does not know the balance, assumes withdrawals can always become dividends later, or discovers the tax consequences after the deadline.
For owner-managed companies, the DLA should sit alongside:
- payroll;
- dividend planning;
- Corporation Tax forecasting;
- personal tax planning; and
- cash-flow management.
That creates a much better question than:
How much can I take from the company today?
The better question is:
How should I take it, what tax will that create, and what does the company need to keep?
Frequently asked questions
What is the Section 455 tax rate in 2026/27?
For relevant loans made on or after 6 April 2026, the rate is 35.75%.
When does a director's loan need to be repaid?
For Section 455 purposes, the important deadline is generally 9 months and 1 day after the end of the company's Corporation Tax accounting period.
The precise treatment depends on the circumstances.
Is a director's loan over £10,000 taxable personally?
It can create a taxable beneficial-loan benefit if the balance exceeds £10,000 and sufficient interest is not paid under the relevant rules.
Can I clear a director's loan with a dividend?
Potentially, if the company has sufficient distributable profits and the dividend is validly declared.
A company cannot create distributable profit simply by labelling a withdrawal as a dividend.
Can Section 455 tax be reclaimed?
Relief may be available after the loan is repaid, released or written off, subject to the rules and claim process.
The refund is not necessarily immediate.
Important: This article is general information, not personal tax advice. Director's loan treatment depends on the exact transactions, company reserves and individual circumstances.