Director Loan Accounts: S455 Tax, Clearance and Overdrawn DLA Rules 2026

What Is a Director Loan Account?

A director loan account (DLA) is a record in the company's accounts of money owed between a director and the company. The balance can be in either direction:

• Credit balance (in credit): The director has loaned money to the company or has left salary/dividends undrawn. The company owes the director money.
• Debit balance (overdrawn): The director has taken more out of the company than they have put in, or more than they are entitled to as salary/dividends. The director owes money to the company.

Most director loan account issues arise when the account is overdrawn -- when the director has effectively borrowed from the company. This triggers several tax provisions, all of which are designed to prevent directors from using the company as a tax-free personal bank account.

Section 455: The Core Charge

Section 455 of the Corporation Tax Act 2010 applies when a close company (broadly, a company controlled by five or fewer shareholders, or any company controlled by its directors -- which covers the vast majority of owner-managed companies) makes a loan to a participator (a shareholder or associate of a shareholder).

When the loan remains outstanding nine months and one day after the end of the accounting period in which it was made, the company pays additional corporation tax equal to 35.75% of the outstanding loan balance.

Example: A company's accounting year ends 31 December 2026. The director's loan account is overdrawn by GBP20,000 at that date and is not repaid by 1 October 2027 (nine months and one day later). The company must pay S455 tax of GBP20,000 x 35.75% = GBP7,150 to HMRC.

This charge is in addition to any other corporation tax the company pays. It is charged on the loan balance, not the company's profits.

Why 35.75%?

The S455 rate is set to approximate the income tax and NI cost that a higher-rate taxpayer director would have paid had they taken the same funds as employment income. It acts as an upfront tax cost to deter directors from using the company as an interest-free loan facility in lieu of taking taxable salary.

The Nine-Month Clearance Rule

The nine-month window (from the end of the accounting period) is a deadline, not a relief. Directors who repay the overdrawn loan before the deadline avoid the S455 charge entirely.

Example: Same facts as above. Director repays the GBP20,000 loan on 15 September 2027 (before 1 October 2027). No S455 charge arises.

If the director can only partially repay the loan by the deadline, the S455 charge applies only to the balance outstanding after the partial repayment.

When the S455 Is Paid

If the loan is not cleared by the nine-month deadline, the S455 charge is included in the company's corporation tax self-assessment return for the relevant accounting period. It is due and payable at the same time as other corporation tax -- typically nine months and one day after the end of the accounting period.

Repayment and Reclaim of S455

The S455 is a temporary charge. When the director repays the loan (or the loan is otherwise relieved -- see below), the company can reclaim the S455 tax from HMRC.

The reclaim is made nine months after the end of the accounting period in which the loan was repaid. This creates a cash flow delay:

1. Director borrows in year 1
2. S455 charge paid nine months after year 1's end
3. Director repays loan in year 2
4. S455 refund received nine months after year 2's end

If the loan is made in year 1 and repaid in year 2, the company could wait up to two-and-a-half years between paying the S455 and receiving the refund. For cash flow planning, this delay is significant.

The Bed-and-Breakfasting Anti-Avoidance Rule

HMRC is alert to directors attempting to avoid the S455 by repaying the loan just before the year end and re-borrowing shortly after. This "bed-and-breakfasting" was widely used to clear the S455 position on paper while maintaining access to the funds.

To counter this, section 455(3) of CTA 2010 provides that where:

• A loan is repaid, and
• Within thirty days before or after that repayment, the same participator takes a new loan from the company of GBP5,000 or more

...then the repayment does not reduce the S455 charge. The new borrowing is treated as matching the repayment, and the S455 continues on the matched amount.

Additionally, where the director intends to re-borrow more than GBP15,000 within the thirty-day window, the thirty-day rule is extended -- HMRC can look through the arrangement even if the timing of the re-borrowing falls outside thirty days, if the facts demonstrate the repayment was artificial.

Practical implication: Directors must genuinely clear their loan account and not re-borrow the same funds. A director who repays GBP30,000 on 28 December 2026 from personal savings, and then re-borrows GBP30,000 from the company on 15 January 2027, will find HMRC treats the repayment as ineffective for S455 purposes.

Benefit in Kind: The P11D Charge

Independently of the S455, if a director borrows more than GBP10,000 from the company at any point during the tax year, a benefit in kind arises under the employment-related loans rules (section 175 of ITEPA 2003).

The benefit is the difference between:

• The interest the director actually paid (if any)
• The interest that would have been payable at HMRC's official rate

HMRC's official rate is set annually. For 2026/27, it is 2.25% (note: check the current HMRC rate as this may have changed from prior years).

Example: Director has an overdrawn DLA of GBP50,000 throughout 2026/27. No interest is charged. Benefit in kind = GBP50,000 x 2.25% = GBP1,125. This is reported on P11D and the director pays income tax on GBP1,125. The company pays Class 1A NI at 13.8% on the benefit.

The threshold is GBP10,000. Below this, no benefit arises. Above it, the benefit applies to the full loan balance (not just the excess over GBP10,000).

Charging Interest

If the company charges the director interest on the loan at or above HMRC's official rate, no benefit in kind arises. The interest paid by the director is income to the company (taxable as non-trading loan relationship income at corporation tax rates) and may also be deductible for the director against rental or investment income in limited circumstances.

Charging market-rate interest resolves the P11D issue but does not affect the S455 charge (which arises regardless of whether interest is paid).

Writing Off a Director Loan

Directors sometimes assume that writing off an overdrawn DLA is a simple way to resolve the issue. It is not -- and the tax consequences of a write-off are harsher than a repayment.

When a company writes off (forgives) a director's loan:

1. The written-off amount is treated as employment income of the director (not a dividend), taxable at income tax rates up to 45% and subject to Class 1 NI.
2. The company must operate PAYE on the written-off amount and account for employer NI.
3. The S455 charge that was paid when the loan was outstanding becomes non-refundable -- because the loan has been written off rather than repaid.

Example: Director has GBP30,000 overdrawn DLA. Company has paid S455 of GBP10,725. Company writes off the loan. The GBP30,000 becomes employment income -- income tax at 40% plus employee NI at 2% = approximately GBP12,600 in personal tax. The S455 of GBP10,725 is not refunded. Total cost: approximately GBP23,325 on a GBP30,000 write-off, compared to GBP0 if the director had simply repaid the loan.

Write-offs are therefore almost always the worst outcome from a tax perspective. Repayment is invariably preferable.

Strategies for Managing an Overdrawn DLA

1. Ensure Adequate Salary and Dividends Are Voted

The most common cause of an overdrawn DLA is directors taking money from the company informally (expenses, personal payments from the company account) without formally voting a salary or dividend. Good bookkeeping and regular reconciliation of the DLA prevents inadvertent overdrawing.

Formally declaring a dividend and crediting it to the DLA rather than paying it to the director's bank account brings the loan account into credit without any cash movement. This is legitimate provided the company has sufficient distributable reserves to support the dividend.

2. Repay Before the Nine-Month Deadline

Where the account is overdrawn at year end, repayment within nine months avoids the S455. If personal funds are not available, consider whether the director can borrow from other sources (mortgage on property, personal loan) to repay the company.

3. Salary Increases Before Year End

If the company has capacity to pay additional salary, this credits the DLA and reduces the overdrawn balance before year end. Additional salary attracts income tax and NI but these costs may be preferable to S455 plus the associated delay.

4. Review the Account Regularly

An overdrawn DLA that is not actively managed can grow to an unmanageable level over several years. Monthly or quarterly reconciliation ensures the director always knows the DLA position and can plan accordingly.

Companies Without S455 Liability

Not all loans by a company to a director trigger S455. The charge does not apply where:

• The director is not a participator (not a shareholder) in a close company -- though most director loans involve director-shareholders
• The loan is to an employee director who owns less than 5% of the ordinary share capital and who is employed on commercial terms comparable to unrelated employees
• The loan is genuinely commercial and on arm's-length terms to a director who is not a significant shareholder

These exceptions are narrow and most owner-managed companies will not benefit from them.

Practical Record-Keeping

Good DLA management requires:

• A dedicated nominal account in the company's books for each director's loan
• Regular postings of all drawings and repayments
• Clear records distinguishing salary, dividends, expense reimbursements, and personal drawings
• Year-end confirmation of the DLA balance before the accounts are finalised
• A note in the company's corporation tax computation of any S455 liability

Company accounts should always disclose director loans (Companies Act requirement) and HMRC will scrutinise accounts where director loans are present.

Conclusion

The director loan account is one of the most misunderstood and potentially costly areas of owner-managed company taxation. The S455 charge of 35.75% is not a penalty -- it is a temporary tax -- but the cash flow cost of paying it and waiting for the refund can be severe. The benefit in kind charge for loans over GBP10,000 adds a further layer of complexity.

The simplest approach is prevention: vote sufficient salary and dividends to cover drawings, reconcile the DLA regularly, and repay any inadvertent overdraft within nine months. Where the account has grown large, professional advice from an accountant or tax adviser is essential before deciding between repayment, salary/dividend clearing, or -- in the most difficult cases -- write-off.