Director’s Loan Accounts: The Tax Traps Directors Often Overlook, Including Director’s Loan Account Tax
A director’s loan account can appear to be little more than a bookkeeping balance. In reality, for an owner-managed company, it can create Corporation Tax charges, personal tax liabilities, benefits in kind, National Insurance costs and compliance problems if it is not monitored properly. 
The issue commonly arises when a shareholder-director takes money from the company that is not salary, a properly declared dividend, reimbursement of a business expense or repayment of money already owed to them.
Once the director has withdrawn more from the company than they have introduced or are otherwise entitled to receive, the director’s loan account may become overdrawn.
That does not necessarily mean anything has been done incorrectly. A company can lend money to its director. The difficulty is that specific tax rules apply, particularly where the company is a close company and the director is also a shareholder.
For the 2026/27 tax year, these rules deserve particular attention because the section 455 tax rate applicable to relevant loans made from 6 April 2026 is now 35.75%.
Understanding director’s loan account tax is crucial for compliance and to avoid unexpected liabilities.
Why this matters
Most owner-managed private companies are “close companies” for tax purposes. Broadly, this means they are controlled by five or fewer participators, or by participators who are directors.
A shareholder is normally a participator.
Where a close company makes a loan or advance to a participator, or to certain associates of a participator, Corporation Tax Act 2010 section 455 can impose a temporary tax charge on the company.
The potential consequences of an overdrawn director’s loan account can therefore arise at two separate levels:
Company level
The company may have to pay a section 455 tax charge.
Director level
The director may have a taxable beneficial loan if the borrowing exceeds the relevant exemption and insufficient interest is paid.
These are separate tax regimes. Paying one does not necessarily remove the other.
That distinction is important because directors sometimes assume that an amount described as a “director’s loan” is simply tax-free money borrowed temporarily from their own company.
Legally and commercially, however, the company is a separate person. Money belonging to the company does not automatically belong to its shareholder-director.
What is a director’s loan account?
Understanding director’s loan account tax Regulations
A director’s loan account records financial transactions between a director and the company that are not dealt with elsewhere as salary, dividends, expenses or another form of remuneration.
The account may be:
In credit
The company owes money to the director.
This can happen where the director:
- introduces personal funds into the company;
- pays company expenditure personally;
- lends money to the business; or
- leaves amounts due to them undrawn.
A director can generally withdraw an amount genuinely owed to them without the withdrawal itself being salary or a dividend.
Overdrawn
The director owes money to the company.
This can arise where the director:
- withdraws company cash personally;
- has personal bills paid by the company;
- uses the company bank account or credit card for private expenditure;
- takes drawings in anticipation of a future dividend;
- receives money that has not been processed as salary or another legitimate payment.
HMRC specifically recognises that the nature of each withdrawal is a question of fact. A payment could be a loan, earnings or a payment on account of earnings depending on the circumstances.
Accurate bookkeeping is therefore essential.
The section 455 tax charge
The main company tax exposure arises under section 455 Corporation Tax Act 2010.
Broadly, where a close company makes a loan to a shareholder or other participator and the loan remains outstanding beyond the statutory repayment period, the company may have to pay section 455 tax.
For loans made on or after 6 April 2026, the section 455 rate is 35.75%, reflecting the increase in the dividend upper rate from that date.
The tax is reported as part of the company’s Corporation Tax compliance, normally through supplementary form CT600A where applicable. HMRC confirms that a qualifying loan outstanding beyond the relevant period must be disclosed through the Corporation Tax return process.
Importantly, section 455 is not an ordinary Corporation Tax charge on company profits.
It is effectively a tax mechanism designed to discourage shareholder-directors from obtaining long-term access to company funds through loans instead of extracting those funds through taxable remuneration or dividends.
When does section 455 become payable?
If the loan is repaid within nine months of the end of the company’s Corporation Tax accounting period, the company can generally avoid having to pay the section 455 charge, although the transaction may still need to be disclosed.
If the loan remains outstanding after that period, section 455 tax becomes payable.
The accounting period is therefore critical.
This is different from the individual director’s tax year.
A director’s personal tax year always runs from 6 April to the following 5 April, whereas the company’s accounting period depends on its own year end.
That means a director’s loan can simultaneously have:
- company tax consequences determined by the company’s accounting period; and
- benefit-in-kind consequences determined by the personal tax year.
Practical Example
Assume KSM Trading Ltd has a 31 March 2027 year end.
Its shareholder-director has an overdrawn director’s loan account of £40,000 at 31 March 2027.
The loan was advanced after 6 April 2026.
The director does not repay or otherwise clear the balance within nine months of the company’s year end.
The potential section 455 liability would be:
£40,000 × 35.75% = £14,300
The company may therefore have to pay £14,300 to HMRC in addition to its ordinary Corporation Tax liability.
However, the £40,000 loan itself has not disappeared. The director still owes £40,000 to the company.
This distinction is frequently misunderstood.
Section 455 tax is not a substitute for repaying the loan, nor does payment of the tax convert the loan into a dividend.
Can the company recover the section 455 tax?
Potentially, yes.
Where the director later repays the loan, or the loan is formally released or written off, the company may be entitled to relief from the section 455 charge under section 458 CTA 2010, subject to the relevant conditions.
HMRC confirms that section 455 tax can be reclaimed following repayment, release or write-off of the loan.
However, relief is not necessarily received immediately when the director repays the money.
This can create a significant cash-flow disadvantage for the company.
For example, a business might temporarily pay £14,300 of section 455 tax on a £40,000 loan even though the director ultimately repays the £40,000.
That is one reason an overdrawn DLA should be monitored before, rather than after, the company’s year end.
The separate beneficial loan charge
Section 455 is only part of the issue.
Where an employer provides an employee or director with a cheap or interest-free loan, the arrangement can also create a taxable benefit in kind.
For 2026/27, HMRC’s official rate of interest for beneficial loans is 3.75%.
Broadly, the taxable benefit represents the difference between:
- interest calculated using HMRC’s official rate; and
- interest actually paid by the director.
There is an exemption where the combined outstanding balance on qualifying loans does not exceed £10,000 throughout the tax year, subject to the detailed conditions.
Once that exemption is lost, the beneficial loan rules need to be considered.
The company will generally need to report a taxable beneficial loan and pay Class 1A National Insurance on the taxable benefit. The Class 1A NIC rate for 2026/27 is 15%.
Example of the beneficial loan issue
Suppose a director has an interest-free loan from the company of £50,000 throughout 2026/27.
Assume, purely for illustration, that the simple averaging method produces a £50,000 assessable loan balance for the whole year.
Using the 2026/27 official rate of 3.75%:
£50,000 × 3.75% = £1,875
If the director pays no interest to the company, the taxable beneficial loan amount could therefore be approximately £1,875, subject to the detailed calculation rules.
The director may suffer Income Tax on that benefit according to their marginal rate.
The company could also incur Class 1A NIC:
£1,875 × 15% = £281.25
This tax exposure is separate from any section 455 charge.
Consequently, the same overdrawn loan can produce both:
- a company section 455 liability; and
- a personal benefit-in-kind charge plus employer Class 1A NIC.
Paying interest to the company
One possible way of reducing or eliminating the beneficial loan charge is for the director to pay sufficient interest to the company.
The interest needs to be genuinely paid, not simply assumed to have been paid.
The company will normally recognise the interest received as company income.
The appropriate treatment should therefore be reviewed on both sides:
Director
Whether sufficient interest has actually been paid to reduce the taxable benefit.
Company
How that interest should be recorded and taxed.
Paying interest may address the benefit-in-kind calculation, but it does not automatically eliminate a section 455 charge on the outstanding principal.
Again, the two regimes are separate.
The 30-day anti-avoidance rule
One of the most important traps is sometimes called “bed and breakfasting”.
Imagine a director owes the company £50,000 shortly before the section 455 payment deadline.
The director repays £50,000.
Two weeks later, the company lends the director £50,000 again.
Without anti-avoidance rules, the director could argue that the original loan had been repaid within the required period.
CTA 2010 contains rules designed to prevent this.
Where repayments of £5,000 or more and new relevant loans of £5,000 or more occur within a 30-day period, the legislation can match the repayment against the new borrowing rather than treating it as repayment of the earlier loan.
The result can be that section 455 relief is denied on the amount effectively reborrowed.
This rule means directors should not assume that temporarily transferring funds into the company before taking them back shortly afterwards will successfully clear a DLA for tax purposes.
The wider arrangements rule
The anti-avoidance legislation goes further.
Even where reborrowing takes place outside the 30-day window, another rule may apply where:
- the outstanding loan is at least £15,000 before repayment; and
- arrangements exist at the time of repayment under which at least £5,000 will subsequently be lent or advanced again.
HMRC describes this as the “arrangements rule”.
The commercial facts therefore matter.
Merely spacing transactions more than 30 days apart does not automatically solve the problem if there was already an arrangement to reborrow the money.
Clearing a DLA with a dividend
An overdrawn director’s loan account can sometimes be cleared by crediting a valid dividend against the balance.
However, the company must actually be legally capable of declaring that dividend.
It needs sufficient distributable profits, and the dividend needs to be validly declared in accordance with the company’s share rights and company law requirements.
The dividend also creates personal Income Tax consequences for the shareholder.
A dividend should therefore not be retrospectively invented simply because an overdrawn loan account has appeared in the year-end accounts.
The underlying legal entitlement and documentation need to support the transaction.
Clearing a DLA with salary or bonus
A salary or bonus may also be credited against an overdrawn loan account.
Again, that does not make the tax liability disappear.
Salary and bonuses can create:
- PAYE;
- employee National Insurance;
- employer National Insurance; and
- payroll reporting obligations.
The company may obtain a Corporation Tax deduction where the relevant conditions are satisfied, but the overall company and personal tax position should be calculated before deciding whether this approach is appropriate.
Writing off a director’s loan
A company may decide to release or write off a loan rather than require repayment.
This should not be confused with simply deleting the balance from the accounts.
Where a close company releases or writes off a loan to a shareholder or participator, tax legislation can treat the amount as a distribution for the individual. HMRC’s Savings and Investment Manual confirms that a loan released or written off can become taxable on the participator.
There can also be National Insurance implications where the borrower is an employee or director. HMRC states that employee loans written off require benefits reporting and can attract Class 1 National Insurance.
Writing off a DLA therefore requires careful review before any accounting entry is posted.
Common pitfalls
1. Treating company money as personal money
A sole shareholder may own 100% of the shares, but the company remains a separate legal entity.
A withdrawal still needs to be classified correctly.
2. Waiting until the statutory accounts are prepared
By the time the accounts are prepared, the nine-month repayment period may be approaching or may already have expired.
Director’s loan accounts should ideally be monitored throughout the year.
3. Assuming section 455 is the only tax issue
Loans exceeding £10,000 can also create beneficial loan implications where insufficient interest is paid.
4. Repaying the loan temporarily and immediately borrowing again
The 30-day and arrangements anti-avoidance provisions can prevent this from achieving the intended tax result.
5. Declaring dividends without sufficient reserves
A dividend requires sufficient distributable profits. A healthy bank balance does not, by itself, establish that those profits exist.
6. Ignoring personal expenditure through the company
Private expenses paid using the company debit card or credit card can accumulate silently in the director’s loan account.
A few transactions each month can result in a substantial overdrawn balance by the year end.
Tax planning and commercial opportunities
A director’s loan account is not inherently problematic.
In many owner-managed companies, it is an entirely legitimate part of the financial relationship between the shareholder and the company.
The objective should be to manage it deliberately.
For example, a director with a substantial credit loan account may be able to withdraw those funds without treating the withdrawal as salary or dividend because they are simply recovering money already owed by the company.
Conversely, where a DLA is overdrawn, the business should consider before the year end whether it will genuinely be:
- repaid from personal funds;
- cleared by a valid dividend;
- reduced through properly processed remuneration;
- offset against amounts genuinely owed to the director; or
- retained as a loan, accepting the resulting tax implications.
The solution will depend on the company’s reserves, cash flow, the director’s personal tax position and the underlying transactions.
Risks and HMRC considerations
HMRC can examine director’s loan accounts as part of Corporation Tax and employer compliance work.
The accounting records should therefore clearly identify:
- money introduced by the director;
- personal expenses paid by the company;
- dividends credited;
- salaries and bonuses;
- expense reimbursements;
- repayments;
- interest charged and actually paid;
- opening and closing balances; and
- the dates of significant transactions.
Where section 455 applies, the company must correctly report the position through its Corporation Tax return and CT600A supplementary pages.
Where a taxable beneficial loan arises, the appropriate employment benefit reporting and Class 1A NIC treatment must also be considered.
Poor records can make it difficult to establish whether a particular withdrawal was a loan, salary, dividend or something else.
Action points for business owners
Directors of owner-managed companies should consider the following before each company year end:
- Obtain an up-to-date director’s loan account balance.
- Identify whether the account is in credit or overdrawn.
- Review significant personal payments made through company bank accounts and credit cards.
- Check whether the balance has exceeded £10,000 during the personal tax year.
- Determine whether sufficient interest has been paid where beneficial loan rules may apply.
- Review any balance expected to remain outstanding nine months after the end of the company’s accounting period.
- Check whether proposed dividends are supported by sufficient distributable profits.
- Review previous repayments and subsequent borrowing for the 30-day and arrangements anti-avoidance rules.
- Ensure section 455 liabilities and beneficial loan benefits are properly reported.
- Avoid waiting until the statutory accounts are completed before addressing a substantial overdrawn balance.
KSM perspective
A director’s loan account should not be regarded as an account that is tidied up once a year when the statutory accounts are prepared.
For shareholder-directors, it can sit at the intersection of company law, Corporation Tax, Income Tax, National Insurance and remuneration planning.
The increased 35.75% section 455 rate from 6 April 2026 makes large overdrawn loan accounts particularly expensive from a company cash-flow perspective. At the same time, an interest-free or low-interest balance above the relevant exemption can create a separate personal tax charge.
The most effective approach is therefore usually preventative.
Businesses should maintain a current director’s loan account, identify private expenditure as it occurs, review the position before the company year end and understand how any proposed repayment, dividend, remuneration or further borrowing will actually be treated for tax purposes.
The purpose is not simply to eliminate an overdrawn DLA at all costs. There may be circumstances in which retaining a loan and accepting the associated tax consequences is commercially appropriate.
The important point is that the result should be understood and planned, rather than discovered months after the company’s year end.
Tax and accounting treatment will depend on the particular circumstances of the company and its shareholders or directors. This article provides general information only and should not be treated as personalised tax, accounting or legal advice. Professional advice should be obtained before implementing any transaction or planning strategy.
This article is general guidance only and does not constitute tailored tax advice. Please contact KSM Consulting Ltd for advice based on your circumstances.
