Director Loan Accounts 2026/27: S455 Tax, P11D Rules and Clearing Strategies

A director loan account (DLA) records every financial transaction between a limited company and its director that is not salary, dividends or expenses. When the company pays the director more than it has formally paid in remuneration, the DLA goes into debit -- meaning the director owes money to the company. This triggers a set of HMRC rules that can be expensive if not managed carefully.

This guide explains how DLAs work in 2026/27, the tax consequences of getting it wrong, and the practical strategies directors use to manage their loan accounts efficiently.

How a Director Loan Account Works

Every time a director takes money from the company that is not formally declared as salary or dividend, it is recorded as a debit entry in the DLA. Every time the company owes the director money -- perhaps for expenses they have paid personally, or for a loan the director made to the company -- it is a credit entry.

The balance can be:

• In credit -- the company owes the director money. No HMRC issues arise.
• Nil -- fully settled.
• Overdrawn (debit balance) -- the director owes the company money. This triggers tax rules.

Directors in owner-managed businesses often operate with fluctuating DLAs, drawing funds throughout the year and then voting dividends or salary at year end to clear the balance. This is legitimate -- but the timing matters enormously.

The S455 Tax Charge

If a DLA is overdrawn at the company's accounting year end and is not cleared within nine months and one day of that year end, the company must pay S455 corporation tax at 33.75% of the outstanding balance.

Example

Your company's year end is 31 March 2026. At year end the DLA is GBP 30,000 overdrawn. The S455 deadline is 1 January 2027 (nine months and one day later).

The GBP 10,125 is paid to HMRC with the company's corporation tax payment. It is refunded -- but only nine months after the end of the accounting year in which the loan is actually repaid. That delay can be 21 months or more, creating a significant cash flow problem.

The P11D Beneficial Loan Rules

If the DLA balance exceeds GBP 10,000 at any point during the tax year, a separate set of rules applies. The loan is treated as a beneficial loan and the director receives a taxable benefit in kind.

The taxable benefit is the notional interest that would have been charged at HMRC's official rate. In 2026/27 that rate is 2.25%.

Worked Example: P11D Calculation

Director has an average DLA balance of GBP 25,000 throughout 2026/27. The company charges no interest.

The company must report this on a P11D by 6 July following the tax year. If the company charges the director interest at 2.25% or more, no BIK arises and no P11D reporting is needed for the interest element.

The Bed and Breakfasting Trap

The bed and breakfasting rule (sometimes called the "30-day rule") blocks a specific avoidance strategy. Before the rule existed, directors would repay their overdrawn DLA just before the nine-month deadline, then re-borrow the same amount days later. This cleared the S455 charge without actually reducing the underlying borrowing.

HMRC now treats any repayment of GBP 5,000 or more as ineffective for S455 purposes if the director:

1. Repays the loan
2. Re-borrows within 30 days

The original loan balance is treated as if it was never repaid. The rule applies to the amount of the re-borrowing, not the full original loan.

Strategies for Clearing an Overdrawn DLA

Directors have several legitimate options for clearing or reducing an overdrawn DLA before the nine-month deadline.

1. Declare a Salary

Voting a salary clears the DLA immediately once it is processed through payroll. Be aware that salary is subject to PAYE income tax and employee/employer NI. For 2026/27 the NLW is GBP 12.71/hour; most directors pay themselves up to the NI secondary threshold of GBP 5,000 to minimise NI costs.

2. Vote a Dividend

If the company has sufficient retained profits, declaring a dividend credits the DLA. Dividends are taxed at 8.75% (basic rate), 33.75% (higher rate) or 39.35% (additional rate) in 2026/27. The dividend allowance is only GBP 500, so most amounts are taxable.

3. Repay Cash

The simplest route if the director has personal cash available. No tax consequence -- just a bank transfer from personal to company account before the deadline.

4. Charge Expenses Through the DLA

If the director has paid company expenses personally and has not yet claimed reimbursement, those amounts can be credited to the DLA. Keep receipts and a clear record.

5. Pay Interest to Avoid P11D Reporting

If the DLA will remain above GBP 10,000 for a sustained period, the director can pay interest to the company at 2.25% or above. This eliminates the BIK reporting requirement and the Class 1A NI charge. The company receives interest income, which is subject to corporation tax.

What Happens if the Loan is Written Off?

If the company formally waives or writes off the overdrawn DLA balance, the amount written off is treated as employment income for the director. It is subject to:

• Income tax at the director's marginal rate (20%, 40% or 45%)
• Class 1 NI (employee and employer) -- because it is employment income, not dividends

The company also loses its right to a S455 refund (since the loan is no longer outstanding to be repaid). In most cases a write-off creates a higher combined tax bill than other clearing strategies and should be a last resort.

Keeping Good Records

HMRC can and does enquire into DLA positions, particularly where large balances arise. Maintain a DLA ledger showing:

• Date and amount of each drawing
• Date and amount of each repayment or credit
• Supporting documentation for salary and dividend declarations
• Board minutes authorising dividends (undocumented dividends may be reclassified as loans)

Summary: DLA Rule Checklist

Use the CalcHub director loan account calculator to model your year-end balance, the S455 deadline, the cost of the S455 charge if unpaid, and the tax cost of different clearing strategies -- so you can choose the most efficient route before the deadline arrives.