March 29, 2026
By Merranti

Writing Off a Director’s Loan Account in the UK (2026 Guide)

If you run a limited company and have taken money out that wasn’t salary or dividends, you may have an overdrawn Director’s Loan Account (DLA).

A common question is:

Can I write off my Director’s Loan Account?

The short answer is:

Yes — but it has significant tax consequences.

In this guide, we explain:

What a Director’s Loan Account is
What happens when it becomes overdrawn
How writing it off works
The tax implications in 2026
Section 455 tax considerations
Alternatives to writing it off
Common mistakes directors make

This is an area where incorrect handling can trigger unexpected personal and company tax liabilities.

What Is a Director’s Loan Account?

A Director’s Loan Account records money:

You lend to the company
or
You borrow from the company

If you take money out of the company that is not:

Salary (processed through payroll)
Dividends (properly declared)
Expense reimbursement

it is usually treated as a loan from the company to you.

If the balance becomes negative (you owe the company money), it is called an overdrawn Director’s Loan Account.

What Happens If Your Director’s Loan Account Is Overdrawn?

If your DLA is overdrawn at your company’s year-end, two main tax issues arise:

1. Section 455 Tax (Company Level)

If the loan is not repaid within 9 months and 1 day after the accounting year-end, the company must pay:

Section 455 tax at 33.75% of the outstanding loan balance.

This is not permanent tax — it is refundable once the loan is repaid or written off — but it creates a cash flow issue.

2. Benefit-in-Kind (Personal Level)

If:

The loan exceeds £10,000 at any point
And no interest (or below official rate interest) is charged

you may have a taxable benefit-in-kind.

This can trigger:

Personal Income Tax
Employer’s Class 1A NIC (currently 13.8%)

What Does “Writing Off” a Director’s Loan Mean?

Writing off a Director’s Loan means:

The company formally decides that the director no longer has to repay the money.

Instead of treating it as a recoverable loan, the company:

Removes it from the balance sheet
Recognises it as an expense or distribution

This sounds simple — but the tax consequences are significant.

Tax Consequences of Writing Off a Director’s Loan (2026)

When a company writes off an overdrawn DLA, HMRC treats it as income for the director.

However, it is not treated as salary.

Instead, it is generally treated as a dividend for tax purposes.

Personal Tax Implications

The written-off amount is treated as dividend income in your hands.

You will pay dividend tax at your marginal rate:

8.75% (basic rate band)
33.75% (higher rate band)
39.35% (additional rate band)

This applies even if there are insufficient distributable reserves — although that creates separate company law issues.

Company Tax Implications

The company:

Cannot deduct the write-off as a Corporation Tax expense
Must have sufficient distributable profits to treat it as a lawful distribution

If not properly structured, there may be compliance risks.

What Happens to Section 455 Tax If You Write Off the Loan?

If Section 455 tax was previously paid:

It becomes reclaimable once the loan is written off

However, the company must formally apply to reclaim it after the relevant conditions are met.

This can create timing delays.

Example: Writing Off a £30,000 Director’s Loan

Assume:

Overdrawn DLA: £30,000
Director is a higher-rate taxpayer

Personal tax:

£30,000 × 33.75% = £10,125 dividend tax

If Section 455 tax was paid earlier:

£30,000 × 33.75% = £10,125

This can be reclaimed by the company, but the personal dividend tax remains.

The economic effect can be complex and requires modelling.

Can You Write Off a Director’s Loan If There Are No Profits?

This is where risk increases.

If the company has no distributable reserves:

The write-off may not qualify as a lawful dividend
It could be treated differently for tax purposes
Company law breaches may arise

In insolvent companies, write-offs are particularly sensitive.

Professional advice is strongly recommended in these situations.

Alternatives to Writing Off a Director’s Loan

Writing off is not always the best solution.

Other options include:

1. Repaying the Loan

The simplest approach is to:

Repay the money to the company before the 9-month deadline

This avoids Section 455 tax.

However, “bed and breakfasting” rules prevent artificial repayment and re-withdrawal within 30 days to avoid tax.

2. Declaring a Dividend

If the company has sufficient reserves, it may declare a dividend to clear the loan balance.

This:

Creates dividend tax for you
Avoids Section 455 tax

This is often more structured than a direct write-off.

3. Paying a Bonus

The company could:

Pay you salary or bonus through payroll

This triggers:

Income Tax
Employee National Insurance
Employer National Insurance

But it may reduce Corporation Tax.

Each route has different tax outcomes.

What If the Company Is Being Closed?

If you are closing the company and have an overdrawn DLA:

The liquidator will treat it as an asset of the company
It may need to be repaid
Or formally written off during liquidation

The treatment can vary depending on solvency and the type of liquidation.

Common Director’s Loan Mistakes

We regularly see:

Taking money assuming “it’s my company”
Not tracking loan balances
Forgetting the 9-month deadline
Attempting to repay briefly before year-end
Writing off loans without reviewing distributable reserves
Not declaring dividends correctly

Director’s Loan Accounts require active monitoring.

When Is Writing Off a Director’s Loan Sensible?

It may be appropriate when:

The company has strong distributable reserves
The director accepts dividend tax liability
Section 455 tax has already been paid
The business is restructuring

However, it should never be done casually.

How Merranti Accounting Can Help

At Merranti Accounting, we regularly assist directors with:

Reviewing Director’s Loan balances
Modelling tax outcomes of repayment vs dividend vs write-off
Calculating Section 455 exposure
Managing dividend declarations correctly
Ensuring compliance with company law requirements
Planning tax-efficient remuneration strategies

We aim to prevent Director’s Loan issues arising in the first place through proactive monitoring and planning.

Final Answer: Can You Write Off a Director’s Loan Account?

Yes, a limited company can write off an overdrawn Director’s Loan Account.

However:

The amount is usually treated as dividend income for the director
Dividend tax will be payable personally
The company cannot deduct it for Corporation Tax
Section 455 tax may be reclaimable
Company law rules must be followed

Because the interaction between dividend tax, Section 455 tax, and Corporation Tax can be complex, writing off a Director’s Loan should be reviewed carefully before action is taken.

Individual circumstances vary, and professional advice should always be sought before formalising a write-off.