Director’s Loan Accounts and Section 455 Tax: What Limited Company Owners Need to Know
Many limited company directors take money in and out of their company during the year.
This may include salary, dividends, business expenses, personal payments, repayments, or money borrowed from the company.
If these amounts are not recorded correctly, they can create problems in the Director’s Loan Account.
For small owner-managed companies, this is an area that needs careful attention.
What is a Director’s Loan Account?
A Director’s Loan Account records money moving between the director and the company.
The company may owe the director money, for example where the director has paid for business expenses personally.
The director may owe the company money, for example where the director has taken money from the company that is not salary, dividend, expense repayment or loan repayment.
When the director owes money to the company, the Director’s Loan Account is usually described as overdrawn.
In simple terms, this means the director has borrowed money from the company.
A limited company is separate from you
A limited company is a separate legal entity.
This means the company’s money does not personally belong to the director or shareholder.
Money taken from the company must be recorded correctly.
It may be:
salary;
dividends;
expense reimbursement;
repayment of money owed to the director;
or a director’s loan.
These are all treated differently for tax.
If money is taken and no clear decision is made, it may end up in the Director’s Loan Account by default.
When does a director’s loan become a tax issue?
A director’s loan is not always a problem.
The issue usually arises when the loan is still outstanding after the company’s year end.
For close companies, section 455 of the Corporation Tax Act 2010 can apply where a loan is made to a participator, which usually means a shareholder.
Most small owner-managed companies are close companies.
A close company is broadly a company controlled by five or fewer participators, or by participators who are also directors.
This means many small limited companies fall within the section 455 rules.
What is section 455 tax?
Section 455 tax is a tax charge paid by the company where a relevant loan remains unpaid for too long.
For loans or advances made on or after 6 April 2026, the section 455 tax rate is 35.75%.
The tax applies where the loan is still outstanding more than nine months and one day after the end of the company’s accounting period.
For example, if the company year end is 31 March 2027, the normal deadline is 1 January 2028.
If the director’s loan is repaid before that date, the company may avoid the section 455 tax charge.
If it is not repaid in time, the company will need to pay section 455 tax and report the loan on the CT600A pages of the Corporation Tax return.
Example: overdrawn loan account
A company has a year end of 31 March 2027.
During the year, the director takes £20,000 from the company.
It is not salary, dividend, expense repayment or repayment of money owed to the director.
The amount is treated as a director’s loan.
If the £20,000 is still outstanding on 1 January 2028, section 455 tax will apply.
The company tax charge will be:
£20,000 × 35.75% = £7,150
This is paid by the company.
It is not the same as Corporation Tax on profits, but it is collected through the company tax system.
Is section 455 tax permanent?
Section 455 tax is usually temporary.
If the director later repays the loan, the company can claim the section 455 tax back.
However, the repayment is not immediate.
The company usually has to wait until nine months and one day after the end of the accounting period in which the loan is repaid before relief is due.
This can create a cash flow problem.
The company may pay the tax long before it can recover it.
What about loans over £10,000?
There is another issue to consider.
If a director has an interest-free or low-interest loan from the company and the loan exceeds £10,000, there may be a taxable benefit.
This is separate from section 455 tax.
For 2026/27, the official rate of interest is 3.75%.
If the company does not charge interest at the official rate, the director may have a benefit in kind.
The company may also need to pay Class 1A National Insurance and report the benefit correctly.
This means one overdrawn loan account can create two separate issues:
section 455 tax for the company;
and a benefit in kind for the director.
Example: benefit in kind on a director’s loan
A director borrows £20,000 from the company.
No interest is charged.
The official rate of interest is 3.75%.
The benefit is calculated by reference to the interest that should have been charged.
A simplified calculation is:
£20,000 × 3.75% = £750 taxable benefit
The director may pay Income Tax on the benefit.
The company may also pay Class 1A National Insurance.
The exact calculation can depend on the loan balance during the year, so good records are important.
Can the director simply repay the loan before the deadline?
Repaying the loan before the nine-month deadline can help avoid section 455 tax.
However, care is needed.
If a director repays a loan and then takes out a similar amount shortly afterwards, anti-avoidance rules will apply.
This is often called “bed and breakfasting”.
In simple terms, the repayment may be ignored or matched with the later borrowing, meaning the loan has not really been cleared for tax purposes.
The repayment should be genuine.
Can dividends clear a Director’s Loan Account?
Yes, in many cases a dividend can be used to clear an overdrawn Director’s Loan Account.
But only if the dividend is lawful.
The company must have enough distributable profits at the time the dividend is declared.
The company should prepare:
board minutes;
dividend vouchers;
updated bookkeeping records;
and a clear Director’s Loan Account ledger.
A dividend should not be created after the event just to explain drawings already taken from the company.
The timing matters.
What if the loan is written off?
Writing off a director’s loan can create tax consequences.
Where the director is also a shareholder in a close company, the write-off is often treated like a distribution for Income Tax purposes.
There may also be National Insurance considerations depending on the facts.
The company should not assume that writing off a loan creates Corporation Tax relief.
This is an area where advice should be taken before any write-off is agreed.
Common mistakes to avoid
Limited company directors should avoid:
treating the company bank account like a personal account;
taking money without deciding whether it is salary, dividend or loan;
leaving the Director’s Loan Account unreconciled until year end;
assuming a later dividend can always fix the position;
forgetting the nine-month deadline;
ignoring the benefit in kind rules on loans over £10,000;
repaying a loan and then taking the same amount back shortly afterwards;
failing to prepare dividend paperwork;
failing to keep evidence of repayments and expenses;
and not reporting the loan correctly on the company tax return.
What records should the company keep?
Good records are essential.
The company should keep:
a clear Director’s Loan Account ledger;
bank statements;
expense receipts;
notes explaining personal payments;
dividend vouchers;
board minutes;
loan agreements where appropriate;
evidence of repayments;
and calculations for any interest charged.
This is especially important for small companies where the director and shareholder are the same person.
The records should clearly show what money has been taken, why it was taken, and how it has been treated.
Practical steps for directors
A good approach is to review the Director’s Loan Account regularly, not just at the year end.
Directors should check:
whether the loan account is overdrawn;
whether any dividends are needed and can lawfully be paid;
whether the company has enough distributable profits;
whether any loan will still be outstanding at the nine-month deadline;
whether the loan has exceeded £10,000;
whether interest should be charged;
and whether any P11D or CT600A reporting is required.
The earlier this is reviewed, the easier it is to plan.
Final thoughts
A Director’s Loan Account is not just a bookkeeping balance.
It records money moving between the director and the company, and it can create tax charges if it is not managed properly.
The key points are:
Company money is not personal money.
Money taken from the company must be recorded correctly.
Overdrawn loan accounts can create section 455 tax.
Loans over £10,000 can also create a taxable benefit.
Dividends can only clear a loan account if they are lawful and properly documented.
At Busy Bee, we help limited company owners stay compliant, tax efficient and in control of their business finances.
Disclaimer: The content on this page is for general information only and should not be treated as tax, legal or financial advice. Tax planning should always be reviewed against your individual circumstances before action is taken.
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