Director's Loan Account: Tax Rules, S455 Charge and How to Clear It

Quick answer

A Director's Loan Account is overdrawn when you've taken more money from your company than you've put in or drawn as salary and dividends. Leave it overdrawn beyond 9 months and 1 day after your company's year-end, and the company pays a 33.75% S455 Corporation Tax charge on the balance. If the loan is £10,000 or more and you're not paying HMRC's official interest rate, there is also a Benefit in Kind for you personally. The good news: the S455 charge is temporary and fully refundable when you repay the loan.

What is a Director's Loan Account?

Every limited company maintains a DLA for each director. Think of it as a running ledger that tracks everything that passes between you personally and your company that doesn't fit neatly into salary, dividends or reimbursed expenses:

Credits to the DLA (you pay money in):

• Personal money you lend the company (common at startup or to cover a cash-flow gap).
• Expenses you pay personally on behalf of the company that haven't yet been reimbursed.

Debits from the DLA (you take money out):

• Cash transfers to your personal account not processed through payroll.
• Company paying personal bills on your behalf (car insurance, personal subscriptions).
• Personal purchases on the company credit card.

The DLA balance is either in credit (company owes you) or overdrawn (you owe the company). These carry completely different tax consequences.

DLA in credit: no tax issue

If you've lent the company more than you've taken out, your DLA is in credit. The company owes you money. You can draw this back at any time without any tax charge — it's your own capital being returned. No income tax, no Corporation Tax. This is common in early-stage companies where the director funds initial costs from personal funds.

You can also charge the company interest on a credit DLA (at a commercial rate), which would be a deductible expense for the company and taxable income for you, but there is no obligation to do so.

DLA overdrawn: tax charges arise

If you've drawn out more than the sum of your DLA credits, salary and declared dividends, the account is overdrawn. This is where both S455 Corporation Tax and potential Benefit in Kind charges arise. The remainder of this guide deals with overdrawn DLAs only.

The S455 charge: how it works

Section 455 of the Corporation Tax Act 2010 (S455) imposes a tax charge on the company when a director's loan account is overdrawn at the company's year-end and is not cleared within a defined window.

The mechanics:

1. Your company's accounting year-end arrives (say, 31 March 2026).
2. At that date, your DLA is overdrawn by, say, £20,000.
3. You have 9 months and 1 day from year-end to repay — so the deadline is 1 January 2027.
4. If you haven't repaid by then, your company must pay S455 tax of 33.75% of the outstanding balance when it files its Corporation Tax return (CT600 + CT600A).
5. S455 tax: £20,000 × 33.75% = £6,750.

The 33.75% rate mirrors the highest dividend tax rate — HMRC's deliberate design to remove the tax advantage of leaving profits in the company via an overdrawn DLA rather than declaring a formal dividend.

S455 is temporary — it is refundable

The S455 charge is not a permanent cost. When you eventually repay the loan, the company can reclaim the S455 tax from HMRC. The repayment claim is made on form LP2 (or via the CT600A in the return for the accounting period in which repayment occurs). HMRC pays it back — but the refund is delayed by 9 months from the end of the accounting period in which repayment is made.

So if you repay the £20,000 in the year ended 31 March 2027, the company can claim back the £6,750 — but HMRC won't refund it until 1 January 2028 at the earliest. This lag creates a real cash-flow cost even if the economic charge eventually reverses.

The S455 clock resets on each company year-end, not cumulatively. A new overdrawn balance at each year-end starts a fresh 9-month window.

Benefit in Kind: the personal tax charge

The S455 charge falls on the company. The Benefit in Kind (BIK) charge falls on you personally.

If your overdrawn DLA balance is £10,000 or more at any point during the tax year, and you are paying the company less than HMRC's official rate of interest, you are receiving a beneficial loan. This is a taxable benefit.

Official rate of interest:

• 2025/26: 2.25%
• 2026/27: 2.25% (same rate announced)

HMRC sets this rate annually. As long as you charge yourself at least the official rate on the DLA balance, no BIK arises.

BIK calculation — worked example:

Tom has an overdrawn DLA of £25,000 throughout 2025/26. He pays the company 0% interest.

Tom pays £225 extra income tax and the company pays £77.63 Class 1A NI — purely from not charging interest on the loan.

To eliminate the BIK entirely, the company charges Tom interest at 2.25%. Tom pays £562.50 interest to the company (taxable in the company as income), and the BIK disappears. Net effect depends on the company's tax position, but for most owner-managed companies this is worth doing.

Important: the £10,000 threshold applies to the aggregate of all loans from the company to the director. You cannot split a £15,000 drawing into two separate £7,500 entries to avoid the BIK rules.

Worked example: overdrawn DLA, full tax cost

Alex's company: year-end 31 March 2026

Alex has been taking £3,500/month in cash drawings from his company throughout the year without processing formal payroll or declaring dividends. At 31 March 2026, his DLA is overdrawn by £42,000.

Immediate deadline: Alex must repay £42,000 by 1 January 2027 to avoid S455.

If Alex does NOT repay by the deadline:

The S455 element (£14,175) will be refunded eventually when Alex repays the loan — but he needs to fund it now.

If Alex clears the DLA by declaring a dividend before 1 January 2027:

• Company declares £42,000 dividend to Alex (assuming sufficient distributable reserves).
• DLA is cleared — S455 does not arise.
• Alex pays dividend tax: £42,000 − £500 allowance = £41,500 × 8.75% (basic-rate band) = £3,631.
• Company has no S455 charge.

Saving by declaring a dividend instead of leaving the DLA overdrawn: £14,175 − £3,631 = £10,544. This is why dividend clearance is almost always the right first-choice method.

Five ways to clear an overdrawn DLA

Not all methods are equally tax-efficient. Here they are ranked from cheapest to most expensive:

1. Declare a dividend

The most tax-efficient route for most directors. If the company has distributable reserves (accumulated profits after Corporation Tax), declare a dividend equal to the overdrawn DLA. The dividend credited to your account clears the DLA.

• Dividend tax rates: 8.75% (basic), 33.75% (higher), 39.35% (additional).
• £500 dividend allowance per tax year.
• No National Insurance.
• Company does not deduct PAYE or NI — simpler payroll.

Caution: the company must have sufficient distributable profits. You cannot declare a dividend if the company has made losses or accumulated losses exceed profits. Doing so creates an unlawful distribution — still a loan, just a poorly-documented one.

2. Pay yourself a salary or bonus via payroll

A formal salary or bonus clears the DLA at source.

• Efficient for earnings up to the NI thresholds (employer NI kicks in at £9,100/year; employee NI at £12,570/year for 2025/26).
• Above those thresholds: employer NI at 15% (from April 2025) + employee NI at 8% on earnings between £12,570-£50,270 applies. This makes salary far more expensive than dividend for larger DLA clearances.
• Income tax at marginal rate (20%, 40%, 45%) also applies.

For a higher-rate director, clearing £42,000 via salary would cost roughly £14,000-£16,000 in combined employer NI + employee NI + income tax — nearly five times the dividend route.

3. Repay cash personally into the company

Simply transfer the money back from your personal account to the company's bank account. No tax cost — you're just returning the loan. This works well when you have personal savings or other income. After repayment, you wait 30+ days before drawing funds again (see the bed and breakfasting rule below).

4. The company writes off the loan

The company formally waives the debt — you no longer owe it the money. This is a legitimate option but the most expensive from a tax perspective:

• The written-off amount is treated as employment income for you (not a dividend).
• You pay income tax at your marginal rate plus Class 1 NI (employee) on the write-off.
• The company pays employer NI at 15% on the same amount.
• The company cannot take a Corporation Tax deduction for the write-off against trading profits in most circumstances.

Avoid unless there is a specific reason — it's the worst-case outcome from a tax perspective.

5. Charge interest above the official rate

The company charges you interest at (say) 3-5% instead of the 0-2.25% that creates a BIK. The interest payments credit your DLA and gradually reduce the overdrawn balance. This is slow and not generally the primary clearance route, but it works for small ongoing balances.

The bed and breakfasting anti-avoidance rule

HMRC is alert to directors who repay a DLA shortly before the S455 deadline and then re-borrow immediately after. The 30-day bed and breakfasting rule prevents this:

If you repay all or part of your DLA, and within 30 days you or any connected person takes a new loan from the same company, HMRC disregards the repayment for S455 purposes.

The effect: the S455 charge is calculated as if the repayment never happened, and the new borrowing is treated as if it extended the original loan.

This also applies when the repayment is made and a new loan of £5,000 or more is taken after the 30 days — if the arrangements were pre-planned, HMRC can apply the rule under broader anti-avoidance provisions in CTA 2010 s464C.

Practical rule: if you repay a DLA to avoid S455, wait at least 31 days before drawing any fresh funds.

The £15,000 disclosure threshold

Under Companies Act 2006 s413, if any director (or person connected with a director) owes the company more than £15,000 at any point during the financial year, this must be disclosed in the company's annual accounts:

• The name of the director.
• The amount outstanding at year-end.
• The highest balance during the year.
• Interest charged.

This is a statutory disclosure requirement — it applies even if the loan was fully repaid before year-end, as long as it exceeded £15,000 at some point. Many small company directors are unaware of this.

Separately, if S455 applies, the company must complete CT600A (the loans to participators supplementary form) when filing its Corporation Tax return.

DLA as an HMRC investigation trigger

HMRC's Connect system analyses company accounts and flags anomalies. A large overdrawn DLA — or a pattern of drawings that don't match declared salary and dividend — is a known investigation trigger for close company enquiries.

When HMRC opens an enquiry into a small company, DLA entries are routinely scrutinised. Unexplained credits and debits, missing board minutes for dividend declarations, and informal drawings without paperwork all create risk.

Best practice to reduce enquiry risk:

• Keep the DLA ledger up to date in your accounting software.
• Pass formal board minutes for each dividend declaration (recording date, amount per share, available reserves).
• Reconcile the DLA to bank statements at least quarterly.
• Clear the overdrawn balance before year-end where possible — avoid S455 entirely.

Optimal DLA strategy for a typical owner-manager

Scenario: Sarah is the sole director and shareholder of a profitable Ltd. She pays herself a salary of £12,570/year (just at the Personal Allowance and above the NI Secondary Threshold) and takes the rest as dividends. During the year she takes £3,000/month in cash drawings as advances.

At year-end (31 March 2026), her DLA is overdrawn by £36,000.

Step 1: Company declares £36,000 dividend before the 1 January 2027 S455 deadline. The dividend credits Sarah's DLA — the overdrawn balance becomes £0.

Tax cost of the dividend (Sarah is basic-rate after salary):

Compare to salary route (clearing £36,000 via payroll on top of existing salary of £12,570):

Dividend route saves Sarah approximately £8,726 compared to clearing via salary — for the same net cash draw from the company.

Common DLA myths debunked

Myth 1: "There's a £5,000 safe harbour — small loans are fine." False. There is no minimum below which S455 does not apply. Any overdrawn balance at year-end that is not repaid within 9 months and 1 day triggers the charge. The only relevant threshold is £10,000 for the BIK rules.

Myth 2: "I can offset my DLA against what the company owes me in salary." Not automatically. Salary must be formally processed through payroll (RTI submission to HMRC). Unprocessed salary sitting as an informal figure in your head does not clear the DLA.

Myth 3: "The S455 is a penalty — I've done something wrong." No. S455 is a tax charge, not a penalty. It is a normal part of corporate tax if you run a DLA in the overdrawn direction. Managing it proactively (clearing by dividend before the deadline) means you never pay it at all.

Myth 4: "If I'm the only director and shareholder, the rules don't apply." They absolutely do. S455 applies to participators in close companies — which includes sole directors who are also shareholders. Being the 100% owner does not exempt you.

2025/26 and 2026/27 rates at a glance

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Sources

• HMRC: Loans to participators in close companies (S455)
• HMRC: Director's loan accounts: tax implications
• HMRC: Beneficial loan arrangements — official rate of interest
• Companies Act 2006: s413 — disclosure of loans to directors in accounts
• HMRC: CT600A — loans to participators supplementary form
• Corporation Tax Act 2010: s464C anti-avoidance provisions