The Director's Loan Account
How the s455 charge works.
Money borrowed from your company has separate company-tax and personal-benefit rules. Check the loan dates, repayment deadline and any interest before drawing or clearing the balance.
What is a Director's Loan Account?
When you operate a limited company, the business is a separate legal entity from you as an individual. The money in the company bank account belongs to the company, not to you.
A Director's Loan Account (DLA) is simply a virtual ledger in your accounting software (like Xero). It tracks all the money moving between you and the company that does not fall under the category of a formal salary, a legally declared dividend, or a legitimate business expense repayment.
At any given time, your DLA will either be in credit (the company owes you money), in debit (you owe the company money-known as an overdrawn DLA), or precisely zero.
Loans TO the Company (DLA in Credit)
If your DLA is in credit, it means the company owes you money. This is an incredibly common, safe, and highly tax-efficient scenario. It typically occurs when:
- You inject personal cash into the business as startup capital.
- You pay for business expenses (like software, travel, or equipment) out of your personal bank account.
- You declare a salary or dividend but choose to leave the cash in the company rather than withdrawing it immediately.
The Tax Advantage of a Credit Balance
You can withdraw funds from a DLA that is in credit at any time, completely tax-free. Because this money has either already been taxed (like a declared dividend left in the company) or was your personal capital to begin with, withdrawing it does not trigger Income Tax or National Insurance.
Loans FROM the Company (Overdrawn DLA)
If you take out more money from the company than you have put in, and that money is not processed as PAYE salary or a legally declared dividend, your DLA becomes overdrawn. You are now in debt to your own company.
An overdrawn DLA usually happens by accident. Directors often treat the company bank account as an extension of their personal finances, withdrawing cash ad-hoc to pay for personal bills, holidays, or living expenses without running the transactions through payroll.
Section 455 rates and repayment dates
Section 455 is a company charge on certain loans by close companies to shareholders or their associates. It is separate from the tax on any cheap-loan benefit received by a director. An overdrawn account does not itself establish tax avoidance.
The rate follows the date of each advance: 35.75% from 6 April 2026, 33.75% from 6 April 2022 to 5 April 2026, and 32.5% from 6 April 2016 to 5 April 2022. A balance containing advances from different periods may therefore need more than one rate.
Repayment and tax payment dates
Repay a loan within nine months of the end of the Corporation Tax accounting period to avoid paying Section 455, subject to the repayment anti-avoidance rules. The tax payment falls due nine months and one day after that period ends. For a £20,000 advance made on 1 July 2026 and still outstanding after the repayment window, the charge is £7,150. An advance made on 1 July 2025 would use 33.75%, giving £6,750.
Section 455 can be reclaimed after the loan is repaid, released or written off. Relief for a repayment after the original nine-month window is not due until nine months and one day after the end of the accounting period containing that repayment. Submit the appropriate claim; payment is not automatically immediate. Interest on late-paid Section 455 is not repaid. A release or write-off can create separate personal tax and National Insurance.
P11D & Benefit in Kind Rules
The s455 charge is a corporate tax issue. However, an overdrawn DLA also triggers a personal tax issue if the balance exceeds a specific threshold.
The small-loan exemption normally applies where the aggregate balance of relevant employment-related loans does not exceed £10,000 at any time in the tax year. Above that, an interest-free or cheap loan can create a taxable benefit. The benefit is the interest calculated under HMRC rules less qualifying interest actually paid, rather than the whole loan principal.
- The company must declare the loan on a P11D form and pay Class 1A National Insurance (15% for 2026/27) on the deemed interest.
- You, as the director, will pay personal Income Tax on the benefit (calculated using HMRC's official rate of interest, 3.75% from 6 April 2026, checked on 6 September 2026; check for any later rate changes).
How to mitigate this: To avoid the BiK charge entirely, the director must pay the company interest on the loan at or above HMRC's official rate.
Clearing a DLA via Dividends
The most common way to legally clear an overdrawn DLA before the 9-month deadline is by declaring a dividend. The company declares a formal dividend, but instead of the cash being paid into your personal bank account, it is credited to your DLA, wiping out the debt.
This is standard practice in salary vs dividends, but it carries a serious corporate consequence: dividends declared without sufficient distributable reserves to support them.
The Retained Profits Trap
You can only declare a dividend if the company has sufficient retained profits (profit after Corporation Tax has been accounted for). If you take out a £50,000 loan, but your company has only made £10,000 in retained profit, you cannot legally declare a £50,000 dividend to clear the debt. Doing so constitutes an illegal or "ultra vires" dividend. If the company goes into liquidation, the liquidator will force you to repay that money personally.
Bed & Breakfasting Rules
In the past, directors would "game" the system. A week before the 9-month deadline, they would repay the £30,000 loan from their personal savings to clear the DLA. Two days later, they would immediately withdraw the £30,000 from the company again, effectively rolling the debt into the next year to avoid the s455 tax.
HMRC introduced strict anti-avoidance legislation known as the Bed and Breakfasting rules to stop this.
The 30-day rule can match repayments totalling at least £5,000 with new loans totalling at least £5,000 in the relevant 30-day period, where the new advances fall in a later accounting period than the original loan. Matching applies to the overlapping amount, rather than automatically ignoring every pound repaid. A separate arrangements rule can apply outside 30 days where at least £15,000 was outstanding and arrangements existed to borrow at least £5,000 again. Repayments giving rise to an Income Tax charge, such as a properly credited taxable dividend, have a statutory exception.
DLA tracked monthly, not at year-end.
Regularly reconcile the loan balance to withdrawals, expense claims, payroll and valid dividends. Keep the date of each advance and repayment, identify any £10,000 benefit threshold breach and plan for the nine-month repayment deadline. Our management accounts service can include these checks.
Book a Director Tax ReviewRelated Services
Related reading
Salary vs Dividends in 2026 - Blue Jay Accountants
How UK company directors can compare salary and dividends, including National Insurance, dividend tax, Corporation Tax and cash extraction.
Read the guide GuideCompany Pension Contributions for Directors
How employer pension contributions can reduce Corporation Tax, what directors need to check, and why timing before year-end matters.
Read the guideFrequently Asked Questions
Is it illegal for a director's loan account to be overdrawn?
An overdrawn account is not automatically unlawful, but the company must follow the loan approval rules and any required shareholder consent. Section 455, employee benefit rules and the company finances must also be checked. The tax rate is 35.75% for loans made from 6 April 2026; repayment within nine months of the accounting period end normally avoids payment, subject to anti-avoidance rules.
Can I write off a director's loan?
A release or write-off can create personal Income Tax for a shareholder-director and employee and employer Class 1 National Insurance through payroll. The company must make the required reports. It is not a tax-free way to clear a loan. Section 455 relief has separate timing and claim rules.
How do I declare an overdrawn DLA on my tax return?
Use the CT600A supplementary pages where required for the company loan and Section 455 position. A taxable cheap-loan benefit is separately reported on form P11D, with Class 1A National Insurance on the benefit value. The director reports the benefit where required on Self Assessment. A loan above £10,000 does not make its whole principal taxable as an annual benefit.
Official sources
Updated 6 September 2026. See Section 455 rates, the 30-day repayment rule, the arrangements rule, employee loan reporting and official interest rates.