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Directors

What is Director's Loan Account?

A Director's Loan Account tracks money you (as director) borrow from or lend to your company. Borrowing from the company has tax implications.

Current Rate (2025/26)

Section 455 tax: 33.75% on loans over £10,000 outstanding at year end

Example

You take £15,000 from company, don't repay by year end. Company pays 33.75% of £15,000 = £5,062 tax (refunded when you repay).

Key Dates

Loans must be repaid within 9 months of year end to avoid S455 tax

How Director's Loan Account Works in Practice

A Director's Loan Account (DLA) is a record of all financial transactions between you as a director and your company that are not salary, dividends, or expense reimbursements. It tracks money you borrow from the company and money you lend to it. The DLA can be in credit (the company owes you money) or overdrawn (you owe the company money). An overdrawn DLA is where tax problems arise.

When you withdraw money from your company that is not salary, dividends, or a legitimate expense reimbursement, it goes onto your DLA as a loan from the company to you. Common examples include using the company card for personal purchases, transferring money to your personal account without declaring it as salary or dividend, or the company paying personal bills.

If the DLA is overdrawn at the end of the accounting period and you do not repay it within 9 months and 1 day of the year end, the company must pay Section 455 tax at 33.75% of the outstanding loan. This tax is repayable by HMRC once you repay the loan, but it ties up the company's cash in the meantime. Additionally, if the loan exceeds £10,000 at any point during the tax year, it is treated as a benefit in kind, and you must pay personal tax on the official rate of interest that you should have been charged.

HMRC closely scrutinises DLAs, particularly the pattern of directors who repay loans just before the year end and then re-borrow shortly after (known as bed and breakfasting). Anti-avoidance rules from 2013 target arrangements where the loan is repaid and then a new loan of £5,000 or more is taken out within 30 days.

Step by Step

Every transaction between you and the company that is not salary, dividends, or expense reimbursement should be recorded on the DLA. Your accounting software or accountant maintains this running balance. At any point, the balance shows whether the company owes you or you owe the company.

If the account is overdrawn (you owe the company), you have several options before the 9-month deadline: repay the loan from personal funds, declare a dividend to offset the balance (only if sufficient retained profits exist), vote yourself a bonus (which triggers PAYE and NI), or formally write off the loan (which is treated as a distribution and taxed accordingly).

The benefit in kind calculation applies when the loan exceeds £10,000 at any point during the tax year. The company must report the loan on form P11D, and you pay personal tax on the benefit, calculated as the official rate of interest (currently 2.25%) applied to the average loan balance. The company also pays Class 1A NI at 15% on the benefit amount.

Practical Tips

  • Keep a separate personal bank card and company bank card, and never use the company card for personal purchases, to avoid accidental DLA transactions
  • Review the DLA balance quarterly with your accountant so you have time to plan repayment before the year end rather than facing a surprise overdrawn balance
  • If you need to borrow from the company, keep it under £10,000 to avoid the benefit in kind charge and P11D reporting
  • Document any loans from you to the company with a formal loan agreement, including interest terms, to create a clean paper trail for HMRC

Common Mistakes to Avoid

  • Not tracking personal spending on the company card or account, allowing the DLA to become overdrawn without realising it until year end
  • Repaying the DLA just before the year end and re-borrowing shortly after, which triggers anti-avoidance provisions (the 30-day rule)
  • Declaring a dividend to clear the DLA when the company does not have sufficient retained profits, creating an illegal dividend
  • Ignoring the benefit in kind implications on loans over £10,000, which creates a personal tax liability and a P11D reporting obligation

Frequently Asked Questions

What is Section 455 tax?

Section 455 tax is a charge of 33.75% that the company must pay on any director's loan that remains outstanding 9 months and 1 day after the end of the accounting period. It is not a penalty; it is repayable by HMRC once the loan is repaid. However, it ties up company cash and must be reported on the CT600.

How do I clear an overdrawn director's loan account?

You can repay the loan from personal funds, declare a dividend to offset the balance (if sufficient retained profits exist), vote yourself a bonus through payroll (triggering PAYE and NI), or the company can write off the loan (treated as income and taxed). Each method has different tax consequences, so consult your accountant.

Is there a benefit in kind on a director's loan?

Yes, if the loan exceeds £10,000 at any point during the tax year. The benefit is calculated at the official rate of interest (2.25%) on the average loan balance. This must be reported on form P11D, and you pay personal tax on the benefit. The company pays Class 1A NI at 15% on the same amount.

Can I lend money to my company?

Yes. If you put personal money into the company, the DLA goes into credit (the company owes you). The company can repay this to you tax-free at any time, as it is repaying a debt rather than distributing profit. You can also charge interest on the loan, which is a taxable expense for you but tax-deductible for the company.

What is the bed and breakfasting rule for director's loans?

If you repay a loan of £5,000 or more and then take a new loan of £5,000 or more within 30 days, the repayment is treated as if it did not happen for Section 455 purposes. This prevents directors from artificially clearing the DLA before the deadline and then immediately re-borrowing.

Source: HMRC CTM61500 - Close Companies: Loans to Participators

Related Terms

Benefit in Kind (BIK)

A Benefit in Kind is a non-cash perk from your employer (like a company car or health insurance) that's taxed as if it were salary.

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