A director's loan account is the record of money moving between you and your limited company that is not salary, a dividend or an expense repayment. If you end up owing the company money and the balance is still outstanding nine months and one day after the company's year end, the company pays section 455 tax. For loans made on or after 6 April 2026 that is 35.75% of the loan. The tax can be reclaimed once you repay, but not quickly, and not the interest.
This guide explains how a director's loan account works, what goes into directors' loan accounts, what happens if you overdraw, how section 455 is worked out, and how to clear a balance without creating a second tax problem. It is written for the company director of a small limited company, including contractors, who draws money from the business.
How a director's loan account works
GOV.UK describes a director's loan as money you (or close family members) get from your company that is not a salary, a dividend or an expense repayment, and is not money you have previously paid into or loaned to the company. You must keep a record of any money you borrow from or pay into the company. That record is usually known as the directors loan account.
At the company's financial year end, whatever you owe the company, or the company owes you, goes on the balance sheet in the annual accounts. That is how loans are shown on a balance sheet: an overdrawn balance is an asset of the company (a debtor), because the company is owed the money. A credit balance is a liability, because the company owes it to you.
The account runs in two directions:
- Overdrawn (a debit balance): the director borrows more than they put in, so you owe the company.
- In credit: you have put in more than you have taken out, so the company owes you.
The account can also sit at zero. The sensible aim is zero or in credit at the year end.
Your personal tax and company tax position both depend on which side of zero the account is. That is why the balance on the last day of the accounting period matters more than any single transaction during the year. Understanding these tax rules before using a director's loan is far cheaper than fixing the tax liabilities afterwards.
What goes into directors' loan accounts
The account picks up anything between the company and its directors that is not taxed as salary or dividend and is not a genuine business expense. Typical entries include:
- a bank transfer from the company account to your personal account that is not a payment of salary or a dividend;
- personal purchases made on a company card;
- business expenses you paid from your own pocket, which reduce what you owe or build up a credit;
- personal money you pay into the company, either as a loan or as a repayment of an overdrawn balance.
No rule limits what a director's loan can be taken for. The rules are about tax and paperwork, not purpose. Each director should have a separate account so individual balances can be tracked.
Do dividends go to a director's loan account?
No. A dividend is a distribution of profit and is recorded as such. A salary payment goes through payroll. Either can, however, be used to clear an overdrawn balance, which we cover below. If you are unsure which of your costs count as proper business expenses and which are personal, our guide to contractor expenses you can claim through your limited company sets out the line.
Dividends paid without profits
One way a company director ends up with an overdrawn account without meaning to is by paying dividends the company cannot support. Dividends can only be paid from distributable profits. If you record a profit that does not exist and pay a dividend, the payment is not a valid dividend. It is treated as a director's loan and becomes subject to the same nine-month deadline. Regular management accounts are the practical guard against this.
Can a director lend money to the company?
Yes, and a credit balance is the straightforward side. If you make a loan to the company with your own money, for start-up costs or to cover a cash flow gap, the company owes you that money. You can take it back at any time without tax, provided the transactions are recorded properly. The company does not pay corporation tax on money you lend it.
If you charge the company interest, that interest is taxable income for you and must be reported on your self assessment tax return. For the company, it is deductible against corporation tax, which is a form of tax relief on the cost of the borrowing. Keep the rate in line with what a commercial lender would charge, so HMRC has no reason to question it.
What happens if you overdraw: section 455 tax
This is where the cost sits. HMRC's Company Taxation Manual explains the rule. Under section 455 of the Corporation Tax Act 2010, where a close company makes a loan or advance to an individual who is a participator (broadly, a shareholder), or to an associate of a participator, the company is due tax. A close company is one controlled by a small number of people, which describes many owner-managed and family companies. HMRC's manual says section 455 applies only if the company is a close company at the time the loan is made. A contractor's one-person limited company will almost certainly fall within it.
The charge is on the company, not on you personally. It is assessed as if it were corporation tax, and the company includes it in its company tax return.
The nine months and one day rule
The test date is nine months and one day after the end of the company's accounting period. If any of the loan is still outstanding then, the company owes section 455 tax on what remains. The clock runs from the accounting period end, not from the day you took the money. A loan taken on the first day of the year gets nearly twenty-one months before the test date. A loan taken the day before the year end gets 9 months.
Part repayments count. If you clear most of the balance but not all of it, the charge falls on whatever is left of the amount of the loan.
A loan you take and fully repay within the same accounting period does not create a corporation tax charge and does not need to be included in the company tax return.
How much tax is charged
The rate is the dividend upper rate in force for the tax year in which the loan is made. HMRC's manual gives these figures:
| Loan made | Section 455 rate |
|---|---|
| Up to 5 April 2016 | 25% |
| 6 April 2016 to 5 April 2022 | 32.5% |
| From 6 April 2022 | 33.75% |
| From 6 April 2026 | 35.75% |
Because the rate is fixed by the date of each loan, a company with loans taken on both sides of a rate change charges each at its own rate. HMRC's manual works an example: loans of £2,000 and £5,000 made before 6 April 2016 at 25%, and £10,000 made in June 2016 at 32.5%. The charge is £500, £1,250 and £3,250, so £5,000 in total.
The charge also applies to each loan made in an accounting period, not to the total balance outstanding. HMRC's example: a £10,000 loan in the first period gives £2,500 at the then 25% rate. A further £5,000 in the next period takes the debt to £15,000, but the second charge is only £1,250, because tax is due on the new loan, not the whole balance. Tax on £15,000 has been paid, once.
A worked example
Say your company's year ends on 31 March. On 1 June 2026 you take £20,000 from the company for a private purpose. It is not salary, a dividend or an expense, so it goes into your director's loan account.
- The loan was made after 6 April 2026, so the section 455 rate is 35.75%.
- The accounting period ends on 31 March 2027. Nine months and one day later is 1 January 2028.
- If the £20,000 is still owing on 1 January 2028, the company owes section 455 tax of £20,000 × 35.75% = £7,150.
- If you had repaid £15,000 by then and owed £5,000, the charge would be £5,000 × 35.75% = £1,787.50.
If the loan is repaid within the nine months and one day, there is no section 455 charge at all.
Interest on late payment, and reclaiming the tax
If the tax is not paid by its due date, interest runs on it until the tax is paid or the loan is repaid. When the loan is later repaid in full, the company can reclaim the section 455 tax under the relief in section 458. The reclaim is not automatic. The company has to claim it. The interest that built up is not refunded. The refund cannot be claimed until nine months and one day after the end of the accounting period in which the repayment was made. The claim is made in the company tax return for the period in which you repaid.
So with the example above, if you repaid in May 2028, that falls in the period to 31 March 2029, and the company could not claim the refund until 1 January 2030. The company is out of pocket for well over two years. That is the real cost of an overdrawn balance, and it is why we would rather you avoid the charge than plan on recovering it.
There is a timing point that helps. Corporation tax for the period itself is also due nine months after the year end, so a company that is about to clear the loan can sometimes settle the position before the extra tax needs paying. Check the exact dates with your accountant before relying on it.
Small loans to employees
HMRC's manual points to an exclusion for certain loans to directors or employees. The conditions are generally given as a loan of no more than £15,000 to someone who works full time for the company and does not have a material interest in it (broadly 5% or more). That will not apply to most owner-directors of a contractor company, because your shareholding is the point of the company. If you think you are within it, take advice and confirm it against HMRC's manual first.
When the loan must be paid back
To stay clear of section 455, the loan must be repaid within the 9 months and one day described above. Put another way, a loan must be repaid within that window, measured from the year end, for no company tax to arise. After that the charge exists even if you repay a week later; you then recover it by claiming relief, as described.
A sensible habit is to treat the year end, not the nine-month deadline, as your real target. Clearing the balance before the accounting period ends removes the charge, the reclaim process, and any argument over how the repayment was funded.
Can I re-take out a director's loan? Bed and breakfasting
The obvious workaround is to repay the loan just before the nine-month deadline and borrow the money again straight afterwards. HMRC knows about this, and calls it bed and breakfasting. Section 464ZA of the Corporation Tax Act 2010, introduced by Finance Act 2013, counters it. If a repayment is caught, it can be ignored for tax purposes, which means the company is treated as though the loan was never repaid.
In practice, a gap of at least 30 days between repayment and new borrowing is the working minimum. A 30-day gap does not make a pattern safe. If you repay and re-borrow year after year, HMRC can still question it. The detail of when the rule applies depends on the amounts and the timing, so get it checked before you repay one loan with the intention of taking another.
So, can I take out another loan once I have repaid? Not as a way round section 455. The clean ways to clear a balance are the ones that do not depend on borrowing again, described below.
Benefit in kind: can I borrow more than £10,000?
There is no legal cap on how much a company director can borrow, but section 455 is a company charge, and there is a personal one too. Using a director's loan can create a beneficial loan, which is taxed as a benefit in kind, when two things are true:
- the loan is interest-free, or you pay interest below HMRC's official rate of interest; and
- the total loan is more than £10,000 at any point in the tax year.
The benefit is calculated at the official rate of interest, less any interest you actually pay. The official rate was 3.75% from 6 April 2025. Check the rate for the tax year you are in, because it is set by HMRC and changes. The benefit is reported on form P11D, and the company pays employer Class 1A National Insurance on the cash equivalent of the benefit. You pay income tax on the benefit as part of your personal tax, through your self assessment return. HMRC has said the reporting rules for this are due to change, so confirm the current route each year.
Charging interest at least equal to the official rate removes the benefit. The interest you pay is income of the company, so it is subject to corporation tax. Even if a loan is under the threshold, using a 0% loan regularly invites the question of whether it is really disguised salary.
The two sets of tax implications can apply to the same loan. HMRC's manual says a loan on beneficial terms to a participator who is also a director or employee may give an earnings charge on the individual in addition to the company's section 455 charge. Each has its own trigger. Section 455 is triggered by a balance outstanding at the nine-month point. The benefit in kind is triggered by size and interest during the tax year.
For larger loans, it is also good practice to get shareholder approval. If you are the only shareholder, this is a formality, but record it.
Taking company money out: how to clear an overdrawn balance
When a director borrows from the company and wants to clear it, there are three ways to make the loan repayment. Each has a cost.
- Pay it back in cash. You transfer money from your personal account to the company. It is the least contentious, because it leaves a clear record that you repaid the loan from your own resources.
- Declare a dividend and set it against the balance. This works only if the company has enough distributable reserves. You need board minutes approving the dividend and a dividend voucher. You pay dividend tax on it personally. Our guide to salary and dividends for contractors in 2026-27 shows how that compares with other ways of taking money out.
- Pay salary or a bonus and set it against the balance. Salary has to go through payroll, with PAYE and National Insurance applied. It also reduces the company's corporation tax, because salary is deductible.
Once the director's loan is repaid, make sure the books show it, and diarise any section 455 reclaim.
What happens when a loan is written off
A company can release or waive a loan instead of collecting it. This does not make the problem go away. Where a loan is written off in a close company, the director-shareholder is usually assessed on the amount written off as deemed dividend income, not as employment income. Getting the formalities right matters: shareholder approval at a general meeting and a formal waiver documented by deed help resist an argument from HMRC that the write-off is really earnings, which would bring National Insurance into play. The write-off also reduces the company's net assets and needs to be reflected in the accounts.
HMRC has been writing to directors who had a loan between April 2019 and April 2023 that was later written off or released, where the income may have been left off a self assessment return. For 2023/24 it says an amendment can still be made to the return. For 2022/23 and earlier, it says to use the digital disclosure service. If you have a written-off loan in that period, get advice before you act.
If the company becomes insolvent, a liquidator may seek to recover a written-off loan from you personally. Liquidation also requires all debts owed to the company, including an overdrawn account, to be repaid in full before remaining funds can be released.
Annual accounts and the records HMRC will ask for
When HMRC checks an owner-managed company, directors' loan accounts are often one of the first things reviewed. It may ask for a detailed analysis showing every debit and credit, whether any bonuses paid through the account were taxed, and whether there was any bed and breakfasting.
A real case shows what can go wrong. A delivery company faced an enquiry into its corporation tax self-assessment return and was asked for its director's loan account transactions. HMRC wanted the date, amount and description of each transaction. The company supplied a record that was not fully itemised or in chronological order. HMRC said it was difficult to reconcile to bank statements, charged non-compliance penalties for inadequate record keeping, and rejected the company's appeal.
Keep, for each director:
- a running ledger in date order, showing the date, amount and description of every entry;
- the bank statements and receipts that support each entry;
- board minutes for dividends and shareholder approval for larger loans;
- loan terms and interest calculations, where interest is charged;
- a year-end balance that agrees with the balance sheet in the annual accounts.
Working with an accountant
The rules are not complicated one at a time, but they interact: the year-end balance, the nine-month date, the rate that applies to each loan, the benefit in kind test and the bed and breakfasting rules. An accountant earns their fee by catching the overdrawn balance in month ten of the year, not month twenty-one.
Frequently Asked Questions
How does a director's loan work?
A director borrows money from the company, or lends money to it, outside salary, dividends and expenses. Every movement is recorded in the director's loan account. If you owe the company money at the year end, tax can follow; if the company owes you, there is no company tax cost.
How are loans shown on a balance sheet?
A balance you owe the company shows as an asset (a debtor). A balance the company owes you shows as a liability.
Can a director lend money to a company?
Yes. You can put your own money in as a loan and withdraw it later without tax, provided it is recorded. Interest, if charged, is taxable on you and deductible for the company.
Do dividends go to a director's loan account?
No. Dividends are a separate distribution. They can, though, be used to clear an overdrawn balance if the company has the reserves and the paperwork is in order.
Can I borrow more than £10,000 from my director's loan account?
There is no legal cap. A loan over £10,000 at any point in the tax year is a benefit in kind if it is interest-free or below the official rate. Section 455 applies to any amount still outstanding at the nine-month point.
When must a director's loan be repaid?
To avoid section 455 tax, before nine months and one day after the end of the company's accounting period.
Can I just write off my director's loan?
The company can, but you will usually be taxed on the amount as a dividend, and the formalities matter. It is not a free way to clear the balance.
Can I take out another loan once I have repaid?
Not as a way round section 455. Section 464ZA targets repaying and re-borrowing, and a repayment that is caught can be ignored. Leave at least 30 days, and do not make it a habit.
Next step
A director's loan account needs a clean ledger, a balance you check before the year end, and a clear plan for clearing it. If you want that handled alongside your annual accounts and company tax return, Deplexify provides accounts and tax for UK contractors and the other small businesses it works with.
Sources
- Director's loans: Overview - GOV.UK — gov.uk, read 2026-10-18
- CTM61505 - Close companies: loans to participators and arrangements conferring benefit on participator: general - HMRC internal manual - GOV.UK — gov.uk, read 2026-10-18
- How to use your director’s loan account effectively | RJP LLP | Blog — rjp.co.uk, read 2026-10-18
- How Does a Director's Loan Account Work | ARB Accountants Blog — arb.accountants, read 2026-10-18
- Why HMRC is interested in directors’ loan accounts - MFW — mfw.co.uk, read 2026-10-18
- Explaining the tax rules on using a director's loan account — ridgefieldconsulting.co.uk, read 2026-10-18
- Directors Loan Accounts: Tax Implications & Tips| IBISS & CO — ibissandco.com, read 2026-10-18
- Director's Loan Accounts (DLA) and Tax - Expert Guidance — mercianaccountants.co.uk, read 2026-10-18
- What is a Director's Loan? A Complete Guide | Hamlyns Chartered Accountants — hamlyns.com, read 2026-10-18
- What is a Director’s Loan Account? | Accountancy Cloud — accountancycloud.com, read 2026-10-18