Director's Loan Account and S455 Charge 2026/27: Complete Guide

What Is a Director's Loan Account?

A Director's Loan Account (DLA) is an account in the company's books that tracks money flows between the director and the company that are not salary, dividends, or reimbursement of legitimate business expenses.

If a director lends money to the company, the DLA is in credit — the company owes the director. If the director takes money from the company — drawings, personal expenses paid by the company, or benefits not formally payrolled — the DLA is overdrawn — the director owes the company.

A DLA can move between credit and overdrawn throughout the year as payments flow in both directions. The year-end position is what matters for S455 purposes. A DLA that is overdrawn at year end, even briefly, can trigger a substantial corporation tax charge.

The S455 Corporation Tax Charge

If a director's loan account is overdrawn at the company's accounting year end, the company must pay a S455 charge under CTA 2010 s455 equal to 33.75% of the overdrawn amount. S455 is paid alongside the corporation tax bill, which falls due 9 months and one day after the year end.

S455 is not a permanent tax — it is a temporary charge that is refunded when the loan is repaid. The 33.75% rate matches the higher-rate dividend tax rate, deliberately making it unattractive for directors to use the DLA as a low-cost alternative to taking a dividend.

Note that S455 is a company liability, not the director's personal tax. The director has no immediate personal tax liability unless the DLA is formally written off by the company.

The 9-Month Repayment Window

If the overdrawn DLA is repaid — or the balance cleared by declaring a salary or dividend — within 9 months and one day of the company's year end, no S455 applies. This is because S455 is assessed on the position at the accounting date, but there is a 9-month window to clear it before the corporation tax due date.

This window gives most directors time to declare a dividend from available profits to clear the DLA, rather than finding external cash. However, dividends require distributable profits, and the dividend must be properly declared by a board resolution — informal payments that are later labelled as dividends may be challenged by HMRC.

Bed-and-Breakfasting Anti-Avoidance

To prevent directors repaying an overdrawn DLA just before the year end and immediately re-borrowing, HMRC operates a 30-day anti-avoidance rule: if a director repays an overdrawn DLA of more than £15,000 and re-borrows within 30 days, HMRC treats the repayment as not having occurred for S455 purposes. The full original overdrawn amount remains subject to S455.

To avoid the bed-and-breakfasting trap:

• Ensure at least 31 days between repayment and any new borrowing above £15,000.
• Do not have a pre-arranged intention to re-borrow more than £15,000 at the time of repayment — HMRC can look at the substance of the arrangement, not just the timing.
• The rule applies even if only part of the re-borrowing occurs within 30 days of the repayment.

Writing Off the DLA

If the company formally waives — writes off — the overdrawn DLA rather than the director repaying it, the tax consequences are significantly worse than many directors expect. The director is treated as having received an employment income payment equal to the amount written off. This is subject to:

• Income tax at marginal rates: 20%, 40%, or 45%
• Employee Class 1 NI: currently 8% between £12,570 and £50,270, then 2%
• Employer Class 1 NI: 15% (no upper limit)

The company gets no corporation tax deduction for the write-off. While writing off the DLA does extinguish the S455 charge, the combined income tax and NI liability can easily exceed the 33.75% S455 amount. Formal write-off should generally be a last resort, considered only after taking advice.

Beneficial Loan Rules (S175 ITEPA 2003)

A loan from a company to a director is a beneficial loan if the interest rate charged is below HMRC's official rate — 2.25% for 2026/27. If the loan balance exceeds £10,000 at any point during the tax year, the director has a taxable benefit in kind.

The BIK value is: (average loan balance during the year) x (HMRC official rate minus rate actually charged). This is reported on the director's P11D, or payrolled if the employer has registered for payrolling of benefits. Class 1A NI at 15% is payable by the company on the BIK value.

Best Practices for Managing a Director's Loan Account

• Reconcile the DLA monthly against payroll records and dividend declarations to avoid unintentional overdrafts that may go unnoticed until the year-end accounts are prepared.
• Ensure dividends are properly declared by a board resolution before cash is taken. Unminuted dividend payments may be reclassified as loans by HMRC.
• Record all personal expenses paid through the company — the DLA must reflect every such payment, including minor items such as subscriptions or personal fuel costs.
• Set a personal policy not to exceed £10,000 outstanding at any time to avoid the beneficial loan BIK rules and the P11D compliance burden.
• Plan the repayment strategy before the 9-month window closes if the DLA is unavoidably overdrawn at year end. A dividend is often the most tax-efficient route if distributable profits exist.

DLA vs Salary vs Dividends

Directors have three main ways to extract value from their company:

• Salary: efficient up to the Personal Allowance (£12,570) and the NI secondary threshold, after which employer and employee NI applies. Corporation tax deductible.
• Dividends: no NI, taxed as income at dividend rates (8.75% / 33.75% / 39.35%), requires distributable profits and a formal board resolution. No corporation tax deduction.
• DLA drawings: no immediate personal tax, but S455 risk on overdrawn balances and BIK rules above £10,000. Should be used only for short-term timing differences, never as a long-term extraction method.

The optimal structure for most director-shareholders is: salary up to the NI secondary threshold (or Personal Allowance if Employment Allowance covers employer NI), then dividends up to the basic-rate band, with DLA used only for genuine short-term differences — for example, where a dividend will be declared at the year end but cash is needed before month end.