Directors’ Loan Accounts Explained: Tax Charges, Benefits in Kind and Section 455

Directors’ loan accounts (DLAs) are a common feature of owner-managed businesses and often arise quite innocently. However, when a director’s loan account becomes overdrawn and is not managed carefully, it can trigger a combination of personal tax charges, National Insurance contributions and corporation tax liabilities.

For business owners and advisers alike, understanding how DLAs work, how overdrawn balances arise, and the tax consequences of leaving them outstanding is essential.

What is a director’s loan account?

A director’s loan account records the financial position between a company and its director. The balance can move in either direction:

• where the director lends money to the company (for example, to fund a start-up), the account is in credit;
• where the director withdraws money from the company that is not salary, dividends or reimbursed expenses, the account becomes overdrawn.

In many personal and family companies, directors take drawings throughout the year on the expectation that a dividend will later be declared to clear the balance once profits are confirmed. Problems arise when drawings exceed available profits or when the loan is left uncleared for too long.

An overdrawn DLA is effectively a loan from the company to the director, and HMRC does not treat this as tax-free borrowing.

How can an overdrawn DLA be cleared?

There are three main ways to clear an overdrawn director’s loan account:

1. Repayment by the director
   The director can repay the loan using personal funds.

2. Declaration of a dividend
   If the company has sufficient distributable reserves, a dividend can be declared and credited to the loan account.

3. Payment of salary or bonus
   The company can pay additional remuneration to clear the loan, although this is often less tax-efficient due to income tax and National Insurance contributions (NICs).

Each option has different tax and cashflow consequences, and timing is critical.

Beneficial loan benefit-in-kind

Where a director borrows money from their company at no interest or at less than HMRC’s official rate, the beneficial loan rules apply.

Key points include:

• The rules apply where total borrowings exceed £10,000 at any point during the tax year.
• The taxable benefit is the interest foregone, calculated using HMRC’s official rate.
• The director pays income tax on the benefit.
• The company pays Class 1A NICs on the same amount.

In many cases, the monetary value of the benefit is relatively modest, but it often comes as an unwelcome surprise. It also creates additional compliance obligations, including reporting on form P11D.

Because the tax charge is capped by the interest foregone (taxed at up to 45%), it is often more cost-effective to suffer the benefit-in-kind charge than to actually pay interest to the company.

Section 455 tax: the main exposure

The most significant tax consequence of an overdrawn DLA is the section 455 charge.

This applies where:

• the company is a close company (broadly, one controlled by five or fewer participators), and
• the loan remains outstanding nine months and one day after the end of the accounting period.

Where the conditions are met, the company must pay a corporation tax charge equal to the dividend upper rate applied to the outstanding loan balance.

Current and future section 455 rates

• 33.75% for loans made before 6 April 2026
• 35.75% for loans made on or after 6 April 2026, following the increase in dividend tax rates announced in the Autumn Budget 2025

This charge exists because HMRC treats long-term overdrawn loans as a substitute for dividends.

Temporary, but still costly

Section 455 tax is unusual in that it is temporary. The company can reclaim the tax once the loan is repaid or written off.

However:

• the tax must be paid upfront, creating a real cashflow cost;
• the refund is only available nine months and one day after the end of the accounting period in which the loan is cleared; and
• delays in HMRC processing can extend this further.

This can be particularly frustrating where the charge arises shortly before a company sale or during due diligence, as it reduces cash balances and complicates negotiations.

Practical takeaway

Directors’ loan accounts are not inherently problematic, but informal drawings and poor monitoring can quickly create tax exposure. Even modest overdrawn balances can result in:

• benefit-in-kind charges,
• additional NIC costs, and
• a substantial section 455 corporation tax bill if loans are not cleared in time.

Regular review of DLAs and early planning around dividends or repayments can prevent these issues arising.

How we can help

If your company has an overdrawn director’s loan account, or you regularly take drawings during the year, we can help you review your position and plan the most tax-efficient way to clear balances. We can also help manage section 455 exposure and ensure timing issues are addressed before they become costly. Please contact us to discuss your circumstances.