Director's Loan Account and S455 Tax: What Ltd Company Directors Must Know 2026

Many limited company directors use their Director's Loan Account (DLA) as a flexible source of personal funds, drawing from the company when cash flow allows. Used carefully, it is a legitimate tool. Used carelessly, it triggers S455 tax, benefit-in-kind charges, and complex repayment mechanics that cost far more than the original benefit was worth.

What Is a Director's Loan Account?

A Director's Loan Account records all financial transactions between you and your company outside of salary, dividends, and expense reimbursements. If you pay for a company expense from your own pocket, the company owes you -- your DLA is in credit. If you draw cash from the company beyond your salary and dividends, you owe the company -- your DLA is overdrawn.

An overdrawn DLA is, in law, a loan from the company to you. It must be disclosed in the company's statutory accounts if it exceeds GBP 10,000 at any point during the year.

Section 455 Tax

Section 455 of the Corporation Tax Act 2010 imposes a tax charge when a director's loan is still outstanding nine months and one day after the company's accounting year-end.

The S455 rate is 33.75% of the outstanding loan balance. This is not a trivial sum.

Example: Your company's year ends 31 March 2026. You have an overdrawn DLA of GBP 30,000. If you have not repaid it by 1 January 2027 (nine months and one day later), your company must pay GBP 30,000 x 33.75% = GBP 10,125 in S455 tax.

The S455 tax is paid alongside corporation tax but is separate from it. It is payable nine months and one day after the year-end, just like the loan deadline itself.

Repayment and Relief

S455 is not a permanent tax -- it is a temporary charge. When you repay the loan to the company, you can claim relief and HMRC will repay the S455 tax paid. However, the repayment of S455 itself is delayed: the relief is available nine months after the end of the accounting period in which the loan was repaid.

Example of the delay: You repay the GBP 30,000 loan in June 2026 (before the January 2027 deadline) -- no S455 is due. But if you repaid it in February 2027 after S455 had already been paid, the refund of GBP 10,125 would not come back until January 2028.

This cash flow impact -- paying S455 and then waiting a year for the refund -- is one of the main reasons directors are advised to monitor DLA balances closely before year-end.

The Bed and Breakfasting Anti-Avoidance Rule

HMRC is aware that directors might try to repay a loan just before the nine-month deadline and then draw the same cash back from the company shortly afterwards. This is known as bed and breakfasting the DLA.

Anti-avoidance rules apply: if a director repays more than GBP 5,000 within 30 days of drawing a new loan of GBP 5,000 or more, HMRC will treat the repayment as ineffective for S455 purposes and the tax will still be due.

Benefit-in-Kind on Loans Over GBP 10,000

Even if you repay the loan before the nine-month deadline and avoid S455, there is a separate charge to consider: benefit-in-kind (BIK) on interest-free or low-interest loans.

HMRC sets an official rate of interest each year. If the company charges you less than this rate on a loan exceeding GBP 10,000, the difference is treated as a taxable benefit. You are charged income tax (through your self-assessment return or via PAYE) on the notional interest, and your company pays employer NI on the same benefit.

For 2026/27 HMRC's official rate is published on gov.uk; it typically follows the Bank of England base rate environment.

To avoid the BIK charge entirely, you can either:

• Keep the loan balance below GBP 10,000 at all times
• Have the company charge you interest at or above the official rate (the interest paid to the company is income for the company and subject to corporation tax)

Writing Off a Director's Loan

Some directors consider asking the company to write off the loan. This is a legitimate option but not a tax-free one: the written-off amount is treated as a dividend for income tax purposes, charged at your marginal dividend rate (10.75%, 35.75%, or 39.35% depending on your income). Your company also does not receive corporation tax relief on the write-off. It is generally not the most tax-efficient outcome.

Disclosure Requirements

If the DLA exceeds GBP 10,000 at any point during the accounting year, it must be disclosed as a related party transaction in the notes to the company's accounts. This applies to micro-entity accounts as well as full statutory accounts, so there is no threshold below which the company can quietly ignore the balance.

Planning Checklist for Directors

• Monitor the DLA balance throughout the year, not just at year-end
• Set a reminder 60 days before the nine-month deadline so you have time to repay
• If the balance exceeds GBP 10,000, consider charging interest at the official rate to avoid BIK
• Avoid repaying and redrawing within 30 days to prevent anti-avoidance treatment
• Discuss salary/dividend planning with your accountant to avoid inadvertently building up an overdrawn DLA

Use the CalcHub limited company tax calculator to model your company's tax position including dividend extraction and director's loan considerations.