Director’s Loan Accounts: The Hidden Tax Trap Inside Your Own Company

Last updated: 23 July 2026

7 min read

A director’s loan account (DLA) is the running record of money moving between you and your limited company that is not salary, expenses or dividends. If you owe the company money at your year end and do not repay it within nine months and one day, the company pays a s455 tax charge — 35.75% of the balance for loans taken on or after 6 April 2026. Owe more than £10,000 at any point and you also trigger a benefit-in-kind charge. Here is how the whole thing works, and how to stay out of trouble.

What is a director’s loan account?

Most limited company directors have dipped into the business account at some point. Maybe it was to cover a quick personal expense, plug a cash gap at home, or tide you over until the next dividend lands. It feels harmless — after all, it is your company.

HMRC sees it differently. Any money you take out that is not salary, a reimbursed expense, or a properly declared dividend goes straight into your director’s loan account. When you put money in, the company owes you. When you take money out, you owe the company.

If the account is in credit (the company owes you), that is fine — the company can repay you tax free whenever cash allows. The trouble starts when the account is overdrawn and you personally owe the company.

What happens if I owe my company more than £10,000?

HMRC treats an overdrawn DLA like any other loan. If at any point in the tax year you owe your company more than £10,000, the loan is classed as a benefit in kind. That means extra income tax for you and Class 1A National Insurance for the company, reported through a P11D (beneficial loans stay on the P11D even after payrolling of benefits becomes mandatory in April 2027).

The benefit is calculated using HMRC’s official rate of interest, which is 3.75% from 6 April 2026 (the rate is now reviewed quarterly, so it can move during the year). If you owed the company £30,000 interest free for a full tax year, you would be taxed on around £1,125 of notional interest as if it were extra income.

You can avoid the benefit-in-kind charge in one of two ways: keep the balance below £10,000 at all times, or pay the company interest at the official rate on the full outstanding amount. The interest the company receives then sits as taxable income in its accounts.

What is s455 tax and when do I have to pay it?

The more painful charge is the Section 455 tax, named after the part of the Corporation Tax Act 2010 that created it. If your DLA is still overdrawn nine months and one day after the end of your company’s accounting period, the company must pay a percentage of the outstanding balance to HMRC on top of its normal corporation tax:

This is not pocket change. On a £40,000 loan taken in 2026/27 and still outstanding at the deadline, the s455 charge is £14,300 that the company has to find and send to HMRC. The rate rose alongside dividend tax in April 2026 — we cover that change in detail in our post on what the s455 rate rise means for you in 2026/27.

The charge is temporary in theory: you can reclaim it in full once the loan is repaid or written off. The reclaim sits under Section 458, and the company has four years from the end of the accounting period in which the loan was repaid to claim. HMRC will not volunteer the refund — you have to ask, and the repayment is not immediate either. It ties up cash most small companies cannot afford to lose.

Can I repay the loan and borrow it back again?

A reasonable question at this point: why not just repay the loan on the last day before the deadline and borrow it again the next day?

HMRC saw that coming. The bed and breakfasting rules have been in force since 2013. If a repayment of £5,000 or more is matched by a fresh advance within a 30-day window, the repayment is ignored for s455 relief purposes — you are treated as never having repaid it.

There are wider rules too. For balances over £15,000, repayments can be matched to new borrowing even outside the 30-day window if there was an intention to redraw the money. Trying to dodge the s455 charge with quick-turnaround repayments is usually a bad idea and can look like deliberate avoidance.

What happens if the company writes off the loan?

Sometimes it becomes clear that a director simply is not going to repay, and the company writes the loan off. That waives the debt, but the tax does not disappear. HMRC treats a written-off director’s loan as a distribution, so you pay dividend tax on it at your marginal rate — 10.75%, 35.75% or 39.35% in 2026/27.

The company can reclaim the s455 charge once the write-off is formally made, but Class 1 National Insurance usually applies too, and the write-off is not deductible for corporation tax. Written-off loans rarely turn out to be the bargain they first appear on paper.

How do I clear an overdrawn director’s loan account?

If you are overdrawn with the clock ticking towards the nine-month deadline, you have a few clean options:

1. Repay in cash from personal funds before the deadline.
2. Declare a dividend (only where the company has enough distributable reserves) and offset it against the balance.
3. Pay a bonus through PAYE and use the net amount to clear the loan — usually the most expensive route, but sometimes the only one available.
4. Net off credit balances elsewhere if the company legitimately owes you money.

The right answer depends on your total personal income, the company’s profits, and whether reserves are available. It is rarely a decision to leave until the last minute — our limited company accounting guide explains where the DLA sits in the wider year-end picture.

How do I stay out of trouble?

Director’s loan accounts are not dangerous in themselves — they are a normal feature of owner-managed companies. What catches people out is treating the company bank account like a personal wallet and forgetting that every pound taken out creates a tax position somewhere.

Keep a monthly eye on the balance. If it drifts above £10,000, plan how to bring it down or budget for the benefit in kind. If year end is approaching and the balance is still red, speak to your accountant early — fixing a DLA a few months after year end is always cheaper than a s455 charge nine months later. Good bookkeeping makes this almost automatic.

Frequently asked questions

Need a hand with your director’s loan account?

We review every client’s DLA position before signing off year-end accounts, because waiting for HMRC to spot the problem is never the best plan. Fixed fees — limited companies from £50 a month, sole traders from £35 a month — with no hourly billing.

Book a free, no-obligation call or ring 0161 531 0959 for a second set of eyes on yours.

This article is general information, not personal tax advice. For advice on your own situation, please get in touch.

Written by Yoni Finke FCCA

Founder of YF Accounting — a fixed-fee, fully digital accountancy practice in Manchester serving SMEs, sole traders and landlords across the UK. One point of contact, unlimited support, no surprise bills.

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Related reading

Allowable Expenses for Limited Companies: What You Can Claim in 2026/276 min read →Limited Company Pension Contributions: The £60,000 Allowance9 min read →S455 Tax Rise 2026/27: What It Means for Director’s Loans8 min read →

This article is part of our Limited Company Tax guide. See the full topic for related reads.