How is a director's loan above GBP 10,000 taxed in a UK Ltd company?

Full answer

A director's loan account (DLA) tracks money borrowed by a director from their own limited company. Small overdrawn balances are common, but loans above GBP 10,000 attract specific tax consequences for both the company and the director. Section 455 Corporation Tax charge: If the director's loan is not repaid within nine months and one day of the end of the company's accounting period in which it was made, the company must pay a Section 455 tax charge of 33.75% of the outstanding loan balance. This mirrors the higher dividend tax rate. The charge is temporary -- when the loan is eventually repaid, HMRC refunds the Section 455 tax, but only nine months after the end of the accounting period in which repayment occurred. The cash-flow cost can therefore be significant. Benefit-in-kind on cheap or interest-free loans: When a director's loan exceeds GBP 10,000 (even briefly during the tax year), HMRC treats any interest charged below the official rate as a taxable benefit in kind. The official rate for 2026/27 should be confirmed with HMRC (rates are set annually). The benefit is the difference between the interest actually paid and what would have been due at the official rate on the average loan balance. The company must report the benefit on form P11D and pay Class 1A employer NI (13.8%) on the benefit value. The director pays income tax on the benefit at their marginal rate through Self Assessment. How to avoid the charges: - Repay the loan in full before the nine-month deadline - Pay a commercial interest rate at or above the HMRC official rate to eliminate the BIK - Vote and pay a dividend or bonus before year-end to clear the balance (but ensure the company has sufficient distributable profits for dividends) Avoiding the anti-avoidance rules: HMRC has rules to prevent bed-and-breakfasting -- where directors repay a loan just before the deadline and immediately re-borrow. Repayments of GBP 5,000 or more followed by re-borrowing within 30 days are ignored for Section 455 purposes if the re-borrowed amount is GBP 5,000 or more.

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