How is an overdrawn director's loan account taxed under Section 455?

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A director's loan account (DLA) records money owed between a director and their limited company. If the director takes more out of the company than they have put in or been paid as salary or dividends, the account is "overdrawn," and specific anti-avoidance tax rules apply to discourage directors from using company funds as an interest-free personal loan indefinitely. **The Section 455 charge** If the DLA is still overdrawn nine months and one day after the end of the company's accounting period, the COMPANY (not the director personally) must pay a Section 455 tax charge to HMRC, calculated at the dividend upper rate -- 33.75% of the outstanding loan balance in 2025/26. **Worked example** A company's accounting period ends 31 March 2026. Its director has an overdrawn loan account of £30,000 as at that date, still unpaid by 1 January 2027 (nine months and one day later). The company must pay Section 455 tax of 33.75% x £30,000 = £10,125 to HMRC alongside its Corporation Tax return. **It is refundable, not a permanent tax** Unlike Corporation Tax, Section 455 tax is repayable once the loan is repaid to the company -- but the repayment claim can only be made from nine months after the END of the accounting period in which the loan was repaid, meaning the company's cash can be tied up with HMRC for well over a year in some cases. This makes S455 primarily a cash-flow penalty rather than a permanent cost, provided the loan is eventually cleared. **Avoiding the charge** The charge is avoided entirely if the loan is repaid in full before the nine-month-and-one-day deadline. Common ways to clear a DLA include declaring a dividend (if the company has sufficient distributable reserves) or paying a bonus (subject to normal PAYE and NI) to offset the balance. **The "bed and breakfasting" anti-avoidance rule** HMRC specifically targets directors who repay a loan just before the deadline and then immediately re-borrow a similar amount shortly afterwards, purely to dodge the S455 charge. If more than £10,000 is withdrawn within 30 days of a repayment, or if repayment and re-borrowing were clearly pre-arranged, HMRC can disregard the repayment and apply the charge anyway. **Separate personal tax charge if the loan exceeds £10,000** Independent of Section 455, if the director's overdrawn loan exceeds £10,000 at any point in the tax year and no or low interest is charged, the director personally faces a benefit-in-kind Income Tax charge on the notional interest saved, calculated using HMRC's official rate of interest (currently reviewed quarterly), reported on the director's P11D, with corresponding Class 1A NI paid by the company. **Practical takeaway** Directors should keep a close eye on their loan account balance throughout the year, plan a dividend or bonus to clear any overdrawn balance well before the nine-month deadline, and avoid quick repay-and-reborrow cycles that HMRC is specifically empowered to unwind.

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