Every owner-managed company has a directors' loan account (DLA), whether the director realises it or not. It simply records the running balance between the director and the company: money you put in, and money you take out that isn't salary, a dividend, or reimbursed expenses. When that balance tips into the company's favour, you owe the company, a specific and often-misunderstood tax charge comes into play.
Overdrawn vs in credit
If the company owes you money (you lent it funds or paid expenses personally), the DLA is in credit and you can draw that back tax-free at any time. The issue is the reverse: an overdrawn DLA, where you have taken more out than you were entitled to through pay or dividends. An overdrawn balance is, in law, a loan from the company to you, and HMRC taxes loans that aren't repaid promptly.
The Section 455 charge
If an overdrawn directors' loan is not repaid within nine months and one day of the company's year-end, the company must pay Section 455 tax on the amount still outstanding. The rate tracks the dividend upper rate, 33.75% for loans made before 6 April 2026, rising to 35.75% for loans made on or after that date (following the Autumn 2025 Budget). So a £40,000 overdrawn loan left unpaid past the deadline triggers a charge of roughly £13,500–£14,300, payable by the company alongside its Corporation Tax.
The good news: s455 is refundable. Once you repay the loan, the company can reclaim the tax, but not immediately. The refund comes nine months and one day after the end of the accounting period in which the loan is repaid, so the money can be tied up with HMRC for a year or more. It is best thought of as an expensive, interest-free deposit you'd rather not make.
"Bed and breakfasting" won't work
A tempting trick is to repay the loan just before the deadline and then re-borrow the same money days later. HMRC closed this down with anti-avoidance rules. Broadly, if you repay £5,000 or more and redraw a similar amount within 30 days, the repayment is matched against the new drawing and ignored for s455. There is a further rule for arrangements to redraw where the balance is £15,000 or more. The practical message: repayments have to be genuine, not circular.
The benefit-in-kind trap on top
Section 455 isn't the only cost. If your overdrawn loan exceeds £10,000 at any point in the tax year and you aren't paying the company interest at HMRC's official rate, there is also a beneficial-loan benefit in kind, a taxable perk on you personally, reportable through the payroll or a P11D, with employer Class 1A NIC for the company. Two separate charges, one overdrawn account.
Writing the loan off is not a clean exit
Releasing or writing off a director's loan doesn't make the tax disappear, it changes its shape. A written-off loan to a director-shareholder is generally taxed on the individual as if it were a dividend, and can carry NIC consequences too. It is rarely the cheapest way out.
How to keep a DLA under control
- Plan your extraction. Decide salary and dividend levels in advance so drawings are covered by declared dividends, not accidental loans.
- Watch the £10,000 line to avoid the beneficial-loan charge, or pay interest at the official rate.
- Clear overdrawn balances before the nine-month deadline, from a genuine dividend, a bonus, or new funds.
- Keep the account current. A DLA reconciled monthly never produces a nasty surprise at year-end.
We manage directors' loan accounts as part of annual accounts and tax planning for owner-managed companies, modelling the salary/dividend mix so drawings stay tax-efficient and the DLA stays out of s455 territory. If yours is drifting overdrawn, book a review before your year-end, not after.