Director's Loan Account Tax 2026/27: Complete Guide

What Is a Director's Loan Account?

A director's loan account (DLA) records the running balance of money owed between a director and their own limited company, covering any transaction that is not salary, dividend, or a genuine business expense reimbursement. If a director takes money out of the company beyond what they are owed in salary or declared dividends, the account becomes "overdrawn", effectively meaning the director owes the company money.

Overdrawn director's loan accounts are extremely common in small owner-managed companies, particularly where dividends are declared but not yet formally documented, or where a director draws cash informally during the year ahead of the year-end accounts being finalised.

The Section 455 Tax Charge

If a director's loan account remains overdrawn nine months and one day after the end of the company's accounting period, the company must pay a Section 455 tax charge of 33.75% of the outstanding balance (aligned with the higher dividend tax rate) to HMRC, in addition to any Corporation Tax the company owes for that period. This charge is designed to stop directors using company loans as an informal, tax-free alternative to salary or dividends.

Importantly, the Section 455 charge is repayable to the company once the loan is subsequently repaid, though the repayment of the charge itself from HMRC can take significant time and is subject to its own separate claim process, which is often overlooked by directors focused only on avoiding the charge in the first place.

The 9 Months and 1 Day Rule

The key deadline to avoid the Section 455 charge is repaying (or otherwise clearing, for example by declaring a dividend or bonus to offset the balance) the overdrawn loan within nine months and one day of the end of the relevant accounting period — the same date Corporation Tax itself is normally due for payment. If the loan remains outstanding beyond this date, the charge applies even if the director later repays the loan shortly afterwards.

Directors planning around this deadline need to track it carefully against their specific company's accounting period end date, since it is tied to the company's own year end, not a fixed calendar date, and can catch directors out if the company's accounting reference date has changed during the year.

Beneficial Loan Interest Benefit-in-Kind

Separately from the Section 455 charge, if a director's overdrawn loan balance exceeds £10,000 at any point during the tax year and the director is not charged interest at least at HMRC's official rate of interest, a benefit-in-kind charge arises on the value of that interest saving. This must be reported on the director's P11D and is subject to Income Tax on the director personally, with the company also paying Class 1A National Insurance on the same benefit value.

Loans that stay below the £10,000 threshold throughout the tax year avoid this specific benefit-in-kind charge entirely, which is one reason many small companies try to keep overdrawn loan balances below this level where practical.

Anti-Avoidance: Bed and Breakfasting

HMRC introduced specific anti-avoidance rules to stop directors repaying an overdrawn loan just before the nine-months-and-one-day deadline, only to redraw a similar amount shortly afterwards — a practice known as "bed and breakfasting" the loan. Where a repayment of £5,000 or more is followed by a new withdrawal of a similar amount within 30 days, the repayment can be matched against the new withdrawal and effectively disregarded for Section 455 purposes, meaning the charge can still apply as though the original loan had never been repaid.

A separate rule also targets larger loans (generally over £15,000) where there is an intention, at the time of repayment, to redraw a similar amount later, even beyond the 30-day window, showing HMRC takes a substance-over-form approach to genuinely temporary repayments designed purely to dodge the charge.

Worked Example

Leo, sole director of his consultancy company, draws £25,000 from the company during the year beyond his salary and declared dividends, leaving his director's loan account overdrawn by that amount at the company's year end. His company's accounting period ends 31 March 2026, so he has until 1 January 2027 to clear the balance.

Because the balance exceeds £10,000 throughout the year and no interest is charged, Leo also faces a beneficial loan benefit-in-kind charge on his P11D. If Leo fails to repay by 1 January 2027, his company must pay a Section 455 charge of 33.75% of the £25,000 balance, refundable only once the loan is eventually repaid and reclaimed from HMRC.

Common Pitfalls

• Missing the 9-months-and-1-day deadline. This is tied to the company\u2019s own accounting period end, not a fixed date, and is easy to miscalculate if the year end has changed.
• Assuming the Section 455 charge is a permanent cost. The charge is repayable once the loan is cleared, but reclaiming it from HMRC involves a separate process and can take time.
• Repaying and redrawing to dodge the charge. Bed and breakfasting anti-avoidance rules can disregard a repayment made shortly before redrawing a similar amount.
• Overlooking the £10,000 beneficial loan threshold. A separate benefit-in-kind charge applies if the loan exceeds £10,000 at any point and no interest, or insufficient interest, is charged.
• Not documenting dividends promptly. Informal cash withdrawals that are intended to be dividends but are not properly minuted and voted can be treated as loan account withdrawals rather than dividends until formally documented.