The Director's Loan Account: Asset, Liability, or Time Bomb?

Almost every director of an owner-managed company has a director's loan account. Many of them have no idea what it actually says, what the rules around it are, or what it could cost them. For some, it is a useful and legitimate planning tool. For others, it is a ticking tax clock, one that quietly accumulates a liability that only becomes visible when it is too late to manage it cleanly.

This blog explains what a director's loan account is, when it becomes a problem, what the tax consequences are, and most importantly how to clear an overdrawn balance in the most efficient way possible. The differences between your options are significant. Getting this wrong can result in paying tax twice on the same amount.

What Is a Director's Loan Account?

A director's loan account (DLA) is simply a running record of all the money flows between a director and their company that are not salary, dividends, or expenses. When you put money into the company, say, funds you introduced when the business started, the DLA is in credit: the company owes you that money and you can draw it back at any time with no tax consequences. When you take money out of the company that is not a salary or a formally declared dividend, the DLA goes into debit: you owe that money to the company.

In practice, DLAs go overdrawn because directors draw cash from the company informally throughout the year such as paying personal expenses through the company account, transferring money to cover a personal mortgage payment, or simply taking more than the declared salary and dividend. None of these drawings are inherently wrong. But they are loans from the company to the director, and loans have tax consequences that many directors and some of their accountants do not fully appreciate until it is too late.

A director's loan account going overdrawn is not automatically a problem. The problem arises when the balance is still overdrawn nine months after the company's accounting year end — and when no plan has been put in place to clear it efficiently.

The Section 455 Charge: The Tax Nobody Expects

If a director's loan account is overdrawn at the company's year end and remains unpaid nine months after that year end, the company faces a corporation tax charge under section 455 of the Corporation Tax Act 2010, commonly known as the s.455 charge. The rate is 33.75% of the outstanding balance. From April 2026, this rises to 35.75% in line with the increase to the upper dividend tax rate.

To make this concrete: a director with an overdrawn DLA of £50,000 that remains unpaid nine months after the year end will trigger a s.455 charge of £16,875 (at the pre-April 2026 rate) or £17,875 (at the new rate). That is a real cash payment from the company to HMRC, not a deductible expense, but not a permanent loss. It is repayable when the loan is eventually repaid. But in the meantime, the company has handed over nearly £18,000 to HMRC on a temporary basis, with no tax deduction to show for it and the interest clock running, which can affect the cashflow of many businesses.

The s.455 charge is repayable but only after the director repays the loan, and only nine months after the end of the accounting period in which the repayment takes place. If the loan is repaid in year two, the s.455 refund does not arrive until nine months after year two ends. The cash flow cost of getting this wrong compounds over time.

How the s.455 charge arises

Director borrows from company		DLA goes overdrawn
Still overdrawn at year end?	YES  →	s.455 charge: 33.75% of balance due 9 months after year end
Loan repaid within 9 months	NO  →	No s.455 charge. But: was interest paid? BIK issues?

* s.455 rate is 33.75% pre-April 2026, rising to 35.75% from 6 April 2026.

The Interest Problem

Even where the s.455 charge does not arise, because the loan is repaid before the nine-month deadline, there is a second issue that is frequently overlooked: beneficial loan interest.

HMRC sets an official rate of interest each quarter. If a director borrows from their company and does not pay interest at or above the official rate, the difference between what they pay and what they should pay is a taxable benefit in kind (BIK), assessable on the director as employment income. For 2026/27, the official rate is 3.75%. On a £50,000 loan, that is £1,875 of interest per year that the director should be paying to the company. If they pay nothing, £1,875 is added to their income and taxed at their marginal rate and the company must report it on a P11D.

The BIK exemption applies where the total loans to the director from the company do not exceed £10,000 at any point in the tax year. Below that threshold, no interest is required and no BIK arises. Above it, the full balance is in scope, not just the amount above £10,000. This catches many directors who treat a modest overdrawn DLA as harmless, not realising that once it creeps above £10,000, the entire balance becomes subject to the BIK rules.

The Anti-Avoidance: Bed and Breakfasting

A common attempt to manage the s.455 charge is to repay the loan just before the nine-month deadline, often by temporarily using personal funds, and then re-borrow shortly afterwards. HMRC anticipated this. The bed-and-breakfasting rules treat any repayment of a DLA of £5,000 or more as ineffective if followed within 30 days by a further advance of £5,000 or more. Where the repayment and re-advance fall within 30 days, the s.455 charge is calculated as if the repayment never happened.

The rules also contain a wider anti-avoidance provision for arrangements where the repayment is made with the intention to re-borrow, even outside the 30-day window. These provisions have teeth. A director who repays £60,000 in March, waits 31 days, and re-borrows £60,000 in May is likely to find HMRC challenging the arrangement under the broader anti-avoidance rules.

Clearing the Balance: Three Options and the Tax Cost of Each

When a DLA is overdrawn and the nine-month deadline is approaching, the director has three main options for clearing it: declare a dividend, pay a bonus or salary, or write off the loan. Each has a different tax profile and a different cash cost. The choice that looks cheapest on the surface is rarely the cheapest in practice.

The table below models each option for a director with an overdrawn DLA of £50,000, with the company paying corporation tax at 25%, and the director as a higher-rate taxpayer.

	Dividend/Write off	Bonus / Salary
Income tax on £50,000	£17,875 *	£20,000
Employee NIC	NIL	£1,000
Net cost to director	£17,875	£21,000
Employer NIC	NIL	£7,500
Corporation tax deduction on payment	NIL	Yes (£14,375)
Net company cost (NIC less CT saving)	NIL	£(6,875) saving
Total tax / NIC suffered	£17,875	£14,125
s.455 charge avoided?	Yes	Yes

Dividend: higher rate taxpayer, no dividend , 35.75% tax on £49,500 = £17,706 less personal allowance assumed used against salary. Illustrative — individual circumstances vary. * Write-off: treated as a deemed dividend under s.455(4) CTA 2010; taxed as dividend income at 35.75% on £50,000.

The table illustrates a result that surprises many directors: where the company pays corporation tax at 25% and the director is already above the upper earnings limit on other income, the bonus is actually the most tax-efficient option, not the dividend. 

The corporation tax deduction on the combined bonus and employer NIC payment (£57,500 × 25% = £14,375) more than absorbs the NIC cost, leaving a net total tax burden of £14,125 against £17,875 for the dividend. The write-off option, which might initially seem appealing because the director simply no longer owes the money, produces exactly the same director-level tax as a dividend, since a written-off loan is treated as a deemed dividend under s.455(4) CTA 2010 and taxed at dividend rates. 

The relative attractiveness of the bonus narrows as the corporation tax rate falls. The optimal route therefore depends on where the company sits in the CT bands: at 25%, the bonus wins; at 19%, the dividend edges ahead; in the marginal relief band between £50,000 and £250,000 profits, where the effective CT rate on the marginal pound is 26.5%, the bonus advantage is at its strongest.

The right answer depends on the company's distributable reserves, its corporation tax rate, the director's other income in the year, and whether the loan can be repaid and re-drawn in a tax-efficient cycle. There is no universal answer; but there is always a better option than doing nothing and letting the s.455 charge land.

What Good DLA Management Looks Like

The directors who handle their loan accounts well are not those who never draw from the company. They are the ones who monitor the account regularly and have a plan for how each drawing will ultimately be characterised. In practical terms, good DLA management involves the following:

• Review early: Review the DLA balance before the company year end, not after. Once the year closes, the nine-month clock is already running.

• Declare dividends properly: Formally declare dividends at the right time. An informal drawing is a loan until a dividend is declared. Backdating a dividend is not possible, the declaration must be made by the directors at a board meeting with a minute to evidence it, and the company must have distributable reserves at that date.

• Monitor the £10,000 threshold: Keep the balance below £10,000 if possible, to stay within the beneficial loan exemption and avoid P11D reporting obligations.

• Do not rely on bed-and-breakfasting: Never assume a repayment followed by a re-draw will go unnoticed. HMRC's Connect system cross-references bank statements, CT returns, and self-assessment data. The bed-and-breakfasting rules are actively enforced.

• Seek advice before the deadline: Where the DLA is overdrawn and cannot be cleared by dividend (because distributable reserves are insufficient), take advice before the nine-month deadline. 

The Bottom Line

A director's loan account is not inherently dangerous. Used correctly, it is a flexible tool for managing cash flow between a director and their company in a way that preserves optionality on how drawings are eventually characterised. Used carelessly, it creates a corporation tax charge that costs nearly 36 pence in the pound on the overdrawn balance on a temporary basis but with real cash flow consequences and a benefit-in-kind charge that many directors do not discover until their P11D arrives.

The most expensive DLA situations we see are not those where the director borrowed a large amount deliberately. They are the ones where small, untracked drawings accumulated over years without anyone monitoring the account, until a new accountant, a sale process, or an HMRC enquiry brought the position to light. By then, the options have narrowed and the cost of clearing the balance is higher than it needed to be.

If you are unsure what your director's loan account currently shows, or you have an overdrawn balance and no clear plan for clearing it before the next nine-month deadline, now is the time to review the position.