Director's Loan Account & Section 455 Tax Explained

If you're a director of your own limited company and you've ever taken money out that wasn't salary or a dividend, you have a Director's Loan Account — and if it ends the year overdrawn, HMRC's Section 455 rules can turn a simple cashflow habit into an unexpectedly expensive tax charge. This guide explains exactly how it works, what changed for loans made from April 2026, and how to avoid the common traps.

What Is a Director's Loan Account?

A Director's Loan Account (DLA) is simply a running ledger inside your company's accounts, tracking every transaction between you and the business that isn't salary, dividends, or a repayment of genuine business expenses. If you pay a personal bill from the company account, take cash out to cover a personal cost, or the company covers something for you that it shouldn't, that goes on your DLA.

If, over the course of the year, you've taken out more than you've put in, your DLA is overdrawn — in effect, you owe your company money, exactly as if it were any other creditor. Many directors run an overdrawn DLA for short periods without issue, dipping into company funds ahead of a dividend and repaying it once profits are confirmed. The problems start when that overdrawn balance is still outstanding once the company's accounting year ends.

Section 455 Tax Explained

Section 455 of the Corporation Tax Act 2010 is HMRC's mechanism for discouraging companies from using director loans as a tax-free alternative to dividends. If your DLA is still overdrawn nine months and one day after your company's accounting period ends, the company must pay additional Corporation Tax on the outstanding balance — even though this isn't really "extra" Corporation Tax in the normal sense, since it's refundable once the loan is eventually repaid.

The rate increase to 35.75% follows the Autumn Budget 2025 rise in the dividend upper rate — Section 455 has historically been set to match the dividend upper rate exactly, since the whole point of the charge is to remove any tax advantage of taking a loan instead of a dividend. Crucially, the rate that applies depends on when the loan was advanced, not on your company's year end, so a company with older and newer overdrawn amounts on the same DLA could have both rates applying to different portions of the balance.

Interactive: Estimate Your Section 455 Charge

Enter your overdrawn loan balance and when it was advanced to see roughly how much Section 455 tax your company could owe if it isn't repaid within nine months and one day of your year end.

The 9-Month Repayment Deadline

The key date isn't your Self Assessment deadline or your Corporation Tax filing date — it's nine months and one day after your company's accounting period ends. For a company with a 31 March year end, that means the loan needs to be cleared by 1 January the following year to avoid Section 455 tax altogether.

If the loan is repaid after that date but before the Corporation Tax return is filed, Section 455 is still technically due and must be paid, but the company can reclaim it once nine months and one day have passed after the end of the accounting period in which the repayment was made — which can mean waiting well over a year between repaying the loan and actually getting the tax refunded. This timing mismatch is one of the most common cashflow surprises for small company directors, and it's worth planning around rather than discovering after the fact.

Interest-Free Loans & Benefit in Kind

Section 455 isn't the only tax consequence of an overdrawn DLA. If your loan balance exceeds £10,000 at any point during the tax year and you're not paying interest at or above HMRC's official rate — 3.75% for 2026/27 — the difference between what you paid and what you should have paid at the official rate is treated as a taxable benefit in kind. This gets reported on a P11D, you pay Income Tax on the benefit, and the company pays Class 1A National Insurance on it too.

Loans that stay below £10,000 throughout the tax year are exempt from this benefit-in-kind charge entirely, which is why many advisers suggest keeping any personal drawings comfortably under that threshold where possible, or formally charging interest at the official rate if a larger loan is genuinely needed.

"Bed and Breakfasting" Rules

HMRC specifically targets a tactic known as "bed and breakfasting," where a director repays an overdrawn loan just before the nine-month deadline — avoiding Section 455 tax — then withdraws a similar amount again shortly afterwards. Anti-avoidance rules mean that if £5,000 or more is withdrawn again within 30 days of a repayment, the repayment can be treated as not having happened for Section 455 purposes, reinstating the charge. Separate rules also apply where a repayment and a fresh withdrawal of £15,000 or more are clearly linked, even outside the 30-day window, if avoiding the charge appears to be the main purpose.

In practice, this means genuinely clearing a director's loan — through a dividend, salary, bonus, or personal funds — is treated very differently from simply cycling the same money in and out around the deadline.

How to Avoid an Overdrawn DLA

1. Vote a dividend before the year end to clear the balance, provided the company has sufficient distributable profits — the most common and straightforward fix.
2. Pay yourself a bonus through payroll to clear the loan, bearing in mind this is subject to Income Tax and NI rather than dividend tax rates.
3. Track your DLA throughout the year rather than only checking it at year end — most overdrawn balances build up gradually and are easier to manage before they become large.
4. Charge interest at the official rate on larger loans if you intend to keep the balance outstanding for a genuine business reason, to avoid the benefit-in-kind charge.
5. Talk to your accountant well before your year end, not after — most of the options above need to happen before the accounting period closes, not retrospectively.

Frequently Asked Questions