Every limited company director has a loan account with their company, whether they know it or not. It is the running tally of money that has gone between you and the business that wasn't salary, wasn't a declared dividend and wasn't a reimbursed expense. Most of the time it sits at a small balance and nobody thinks about it. Then one March a client rings me because they've taken £3,000 a month all year, the dividends were never actually declared, and the accounts say they owe the company £36,000.
This is the most common tax surprise I see in owner-managed companies, and it is almost always avoidable. Here is how the account works, what it costs when it goes wrong, and what the options are when it has.
What the director's loan account actually is
Your company is a separate legal person. Money it earns is its money until it is paid to you in one of three ways: as salary through payroll, as a dividend properly declared out of profits, or as a repayment of something you have already paid for on its behalf. Anything else that moves from the company to you is a loan, and anything you put in is a loan the other way.
The account is just the record of all that. If it is in credit, the company owes you (you put savings in to start it, say, or paid for the van personally). If it is overdrawn, you owe the company. Overdrawn is where the tax starts.
How people end up overdrawn without meaning to
Hardly anyone sets out to borrow from their company. It creeps up through habits that feel harmless:
- Drawing a round sum each month and sorting the paperwork "later". Until a dividend is declared with the proper board minute and voucher, those transfers are a loan.
- Putting personal spending on the company card. The supermarket, the holiday, the kids' school fees. Each one adds to the balance.
- Declaring a dividend the company couldn't afford. A dividend can only be paid out of profits available for the purpose. If the profits weren't there, the payment is unlawful and gets treated as a loan to you instead.
- Treating a VAT refund or a quiet month as spare cash. It isn't yours until the profit is made and declared.
None of this is a problem on the day. It becomes one at a specific date on the calendar.
The nine-months-and-a-day rule, and the 35.75% charge
If the account is still overdrawn nine months and one day after the company's year end, the company pays an extra tax charge on the outstanding balance. HMRC calls it a section 455 charge. The rate tracks the higher dividend rate, which rose in April 2026, so:
- 35.75% on loans made on or after 6 April 2026
- 33.75% on loans made between 6 April 2022 and 5 April 2026 that are still outstanding
It is paid with the corporation tax for that year. The sting is that it isn't a permanent tax, it's a deposit: the company gets it back once the loan is repaid, but not straight away. The refund becomes due nine months and a day after the end of the accounting period in which you cleared the balance, and you have to claim it.
| Example: £20,000 overdrawn, 31 March year end | Date | Effect |
|---|---|---|
| Loan still outstanding at the year end | 31 March 2027 | Clock starts |
| Nine months and a day later: still not repaid | 1 January 2028 | £7,150 section 455 tax due with the corporation tax |
| Loan repaid during the following year | June 2028 | Nothing yet |
| Refund of the £7,150 becomes claimable | 1 January 2029 | Company gets its money back, no interest |
So a £20,000 balance that was "only temporary" turns into £7,150 lent to HMRC for the best part of a year, interest-free, at exactly the point most small companies are also paying their corporation tax. That is the real cost: cash, at the worst time.
Over £10,000? There's a benefit in kind as well
Separately from section 455, if your loan balance goes over £10,000 at any point in the tax year, HMRC treats the cheap borrowing as a perk of the job. The benefit is the interest you would have paid at HMRC's official rate, currently 3.75%, less any interest you actually paid the company.
On a £30,000 interest-free loan held for a full year that is a £1,125 benefit. It goes on a P11D, you pay income tax on it at your marginal rate (£450 for a higher-rate taxpayer), and the company pays Class 1A National Insurance at 15% on top, about £169. Not ruinous, but it is paperwork and tax for no good reason.
The easy fix is to have the company charge you interest at the official rate. Then there is no benefit to report at all. The interest is taxable income for the company, but at a far lower cost than the benefit route, and it keeps the P11D off the to-do list.
Repaying it the day before, then taking it out again
The obvious dodge, clearing the balance just before the deadline and drawing it straight back out, has been closed for years. If you repay £5,000 or more and borrow £5,000 or more again within 30 days, the repayment is ignored for section 455. For balances of £15,000 or more, HMRC also ignores a repayment made when there was already an arrangement to re-borrow, whatever the timing. "Bed and breakfasting", as it's known, does not work.
Four ways to clear an overdrawn loan account properly
There are only four, and each has a tax cost. The job is to pick the cheapest one for your situation before the nine-month date, not after it.
- Declare a dividend. If the company has profits available, a dividend credited against the loan clears it with no cash moving. You pay dividend tax on it personally (10.75% at the basic rate in 2026/27, 35.75% at the higher rate), but the company pays nothing extra. This is the usual answer, and it needs a board minute and a dividend voucher dated before the deadline, not written up afterwards.
- Vote a bonus. Paid through payroll, so PAYE and National Insurance both apply, but it is deductible for corporation tax. Rarely cheaper than a dividend for an owner-director; sometimes the only route when there are no distributable profits.
- Repay it from your own money. Straightforward if you have it. Mind the 30-day rule above.
- Have the company write it off. Last resort. The amount written off is taxed on you as if it were a dividend, National Insurance can apply where it is really a reward for your work, and the company gets no corporation tax deduction for it. Expensive, and it tends to invite questions.
When the company owes you
A credit balance is the comfortable version. The company can repay you whenever it has the cash, with no tax at all, because it is your money coming back. You can also charge the company interest on what it owes you. The company deducts basic-rate tax from the interest and reports it to HMRC quarterly on a form CT61, you declare the interest on your tax return, and the company gets a corporation tax deduction. For a director who has lent the company a meaningful sum, that is worth doing properly rather than leaving the money sitting there unpaid.
How I keep clients out of this
The whole problem comes from finding out at the year end. So I don't wait for the year end. Every client's loan account is a live line in Xero, I look at it when I reconcile the bank each month, and if a balance is building I say so in the same month, when the fix is a dividend minute rather than a tax charge. Where someone genuinely needs to borrow more than £10,000 for a while, we put the interest in place up front so there is nothing to report. It is a ten-minute job in October and a four-figure one in January.
Director's loan account FAQs
What is a director's loan account?
It is the running record of money between you and your company that isn't salary, a declared dividend or an expense repayment. If you have taken more out than you have put in, the account is overdrawn and you owe the company; if the reverse, the company owes you. It sits in the company's balance sheet and HMRC takes a close interest in it.
How much tax is there on an overdrawn director's loan?
If the loan is still outstanding nine months and a day after the company's year end, the company pays 35.75% of the balance to HMRC for loans made on or after 6 April 2026 (33.75% for older loans). It is refunded after the loan is repaid, nine months and a day after the end of the accounting period in which you repay it, and only once the company claims it back.
Can I borrow up to £10,000 from my company tax-free?
Not quite. Keeping the balance at £10,000 or below avoids the benefit-in-kind charge, so there is no P11D and no Class 1A National Insurance. The section 455 charge still applies to any balance, however small, that is outstanding nine months and a day after the year end. The £10,000 is a threshold for one charge, not a tax-free allowance.
What if I can't repay my director's loan?
Talk to your accountant before the nine-month deadline, not after. If the company has profits, a dividend can be credited against the loan without any cash changing hands. If it doesn't, the options are a bonus through payroll or a write-off, both of which cost more. Leaving it is the most expensive choice, because the section 455 charge arrives on top of whichever route you eventually take.
Find out before the nine-month date
An overdrawn loan account is a cheap problem in October and an expensive one in January. Here is what I do for the directors I work with:
- A live loan account — reconciled monthly in Xero, so a building balance gets flagged the month it starts
- Dividend planning — profits checked and the paperwork done in time, so drawings become dividends rather than loans
- Interest where it's needed — set at the official rate for balances over £10,000, so there is no benefit in kind to report
- Section 455 handled — the charge calculated, paid and reclaimed on the right dates if it can't be avoided
- Plain English — a straight answer on what you can take out, and when
This post is intended as general guidance only and reflects rates and thresholds for the 2026/27 tax year. Always seek specific advice tailored to your own circumstances and refer to the latest HMRC guidance.
