Director's loan account explained: rules, tax traps and how to stay compliant

Every year, HMRC collects hundreds of millions of pounds in s.455 Corporation Tax from UK companies whose directors borrowed money and didn't pay it back in time. Not because those directors were doing anything shady — but because nobody explained the rules before they moved the money.

If you're a director-shareholder of a UK limited company and you've ever transferred company funds to your personal account — to cover a mortgage payment, bridge a gap before dividends, or simply because the money was there — you've created a director's loan account (DLA). And that account comes with tax consequences that catch founders off guard year after year.

This guide explains how director's loan accounts actually work, when HMRC will charge you extra Corporation Tax at 33.75%, how the benefit-in-kind rules apply, and how to clear an overdrawn DLA without triggering the traps that trip up thousands of UK founders.

What is a director's loan account?

A director's loan account is a running record of all money moving between you and your company that isn't salary, dividends, or legitimate expense reimbursements. Every time you draw money from the company outside of those three channels, it goes on the DLA as a debit. Every time you put personal money into the company — or the company owes you for expenses you've paid out of pocket — it goes on as a credit.

The balance can swing in either direction:

• Overdrawn DLA (you owe the company) — this is the position that triggers tax consequences. It means you've withdrawn more than you've put in or been owed.
• In-credit DLA (the company owes you) — you've lent the company money, or it owes you for expenses. The company can repay you at any time, tax-free, and you can charge interest (though the interest is taxable income for you).

The DLA must appear on the company's balance sheet in the annual accounts. Your accountant tracks it as part of year-end, but the responsibility for the tax consequences sits squarely with you as director and with the company.

When does an overdrawn DLA become a tax problem?

An overdrawn director's loan account creates two distinct tax issues, and many founders don't realise they're separate:

1. The s.455 Corporation Tax charge

Under s.455 of the Corporation Tax Act 2010 (formerly s.419 ICTA 1988), if your company has lent you money and that loan is still outstanding nine months and one day after the end of the accounting period, the company must pay a tax charge of 33.75% of the outstanding balance.

That is not a typo. The rate is 33.75% — deliberately set to match the upper-rate dividend tax rate so that there is no advantage to taking a loan instead of a dividend. For a loan made before 6 April 2022, the rate is 32.5%.

Here's what that looks like in practice:

• Your company's year-end is 31 March 2026.
• The Corporation Tax payment deadline is 1 January 2027 (nine months and one day later).
• If you still owe the company £20,000 on that date, the company pays an additional £6,750 in s.455 tax on top of its normal Corporation Tax bill.

The s.455 charge is reported on form CT600A, which accompanies the company's Corporation Tax return. The good news: s.455 tax is refundable. When you repay the loan — or the company writes it off — the company can reclaim the tax. But the refund isn't instant. HMRC will not process the repayment until nine months and one day after the end of the accounting period in which the loan was repaid. That is a long time to have cash tied up with HMRC.

The company can reclaim within four years of the end of the accounting period in which the loan is repaid. Claims within two years use form CT600A; claims after two years use form L2P.

2. The benefit-in-kind charge

If your overdrawn DLA balance exceeds £10,000 at any point during the tax year, and the company either charges no interest or charges interest below the HMRC official rate, the loan is treated as a benefit in kind (BIK).

The HMRC official rate of interest is currently 3.75% (from 6 April 2025). The BIK is calculated as the difference between the interest you actually paid and the interest that would have been charged at the official rate.

The consequences:

• The company must report the benefit on form P11D and pay Class 1A National Insurance at 13.8% on the benefit amount.
• You pay income tax on the benefit through your Self Assessment return — at your marginal rate (basic 20%, higher 40%, additional 45%).
• If the loan balance never exceeds £10,000 during the tax year, the benefit is exempt and no P11D reporting is needed.

You can avoid the BIK charge by paying interest at the official rate. That interest is taxable income for you personally, but deductible for the company — and the amounts are typically much smaller than the alternative tax bills.

How to clear an overdrawn director's loan account

If you've taken money out and the DLA is overdrawn, you have several options to clear it before the nine-month deadline. Each has different tax implications:

Option 1: Simply repay the money

The most straightforward route. Transfer the money back from your personal account to the company bank account. If you do this before the nine-month-and-one-day deadline, no s.455 charge arises. Make sure you keep clear records — a bank transfer with a reference like "DLA repayment" is ideal. HMRC may ask for evidence that the repayment was genuine.

Option 2: Declare dividends to offset the loan

If the company has sufficient distributable profits, the directors can declare a dividend and apply it against your overdrawn DLA. You'll owe dividend tax on the amount — at 10.75% (basic rate), 35.75% (higher rate), or 39.35% (additional rate) for the 2026/27 tax year — but you avoid the 33.75% s.455 charge and the cash stays where it is.

Declare the dividend properly: board resolution, dividend voucher, and a check that distributable profits genuinely exist. An unlawful dividend — one declared when profits don't support it — is void and must be repaid, which puts you right back to an overdrawn DLA.

Option 3: Vote yourself a bonus

The company can pay you a salary bonus and set it against the DLA. The company gets a Corporation Tax deduction on the salary cost, but the bonus is subject to income tax and National Insurance — both employee and employer contributions. For higher-rate taxpayers, the combined NI and income tax burden on a bonus can exceed the dividend route, so run the numbers before choosing this option.

Option 4: The company writes off the loan

The company can formally release or write off the debt. When it does:

• The written-off amount is treated as a distribution to you, taxed as if it were a dividend.
• The company will owe Class 1 National Insurance on the written-off amount.
• Any s.455 tax previously paid becomes reclaimable.

Writing off a loan is rarely the most tax-efficient option, but it can make sense when the director cannot realistically repay and the company wants to draw a line under the balance.

The bed-and-breakfasting trap

This is the rule that catches the cleverest founders. "Bed and breakfasting" describes the practice of repaying a director's loan just before the deadline, then borrowing the same amount (or more) shortly afterwards. HMRC saw through this years ago and introduced anti-avoidance rules to stop it.

There are two triggers:

1. The 30-day rule: if you repay all or part of a loan and then re-borrow £5,000 or more within 30 days of the repayment, the repayment is treated as if it never happened. The s.455 charge remains on the original amount.
2. The arrangements rule: if you repay £15,000 or more and, at the time of repayment, there are arrangements in place for you to receive a new loan or payment from the company, HMRC can disregard the repayment regardless of the timing.

The practical lesson: if you repay the DLA, it needs to stay repaid. Don't repay £20,000 on 30 December and borrow £20,000 on 15 January. HMRC's systems flag exactly this pattern.

Step-by-step: managing your DLA through the tax year

Good DLA management isn't complicated — it's just something that needs attention at the right moments. Here's the timeline that keeps you clear of penalties:

During the accounting period

1. Track every withdrawal and repayment. Your bookkeeper or accountant should maintain a live DLA balance. If you use accounting software like Xero or QuickBooks, there should be a dedicated director's loan account in the chart of accounts.
2. Watch the £10,000 threshold. If the overdrawn balance goes above £10,000 at any point, the benefit-in-kind clock starts ticking. Consider paying interest at the official rate (3.75% from 6 April 2025) to neutralise the BIK.
3. Separate personal and company spending. Use a company card for business expenses, not your personal card — and don't use the company card for personal purchases. Every mixed transaction muddles the DLA.

At year-end

1. Review the balance with your accountant. If the DLA is overdrawn, discuss the clearance strategy — repayment, dividend, bonus, or a combination.
2. Declare dividends if appropriate. This is the most common method. Ensure the company has distributable profits and follow the proper declaration process.
3. File the P11D by 6 July. If the BIK rules apply (loan exceeded £10,000 and interest was below the official rate), report it on form P11D for the relevant tax year.

Before the Corporation Tax deadline

1. Clear the balance by nine months and one day after year-end. This is your hard deadline to avoid the s.455 charge.
2. Complete the CT600A. Even if the loan is repaid, report the DLA position on the CT600A supplement to the Corporation Tax return.
3. Don't bed-and-breakfast. If you repay, stay clear of re-borrowing £5,000 or more within 30 days.

Common mistakes that cost directors thousands

After years of helping founders navigate Companies House filings and compliance, we see the same DLA mistakes on repeat:

Treating the company account as a personal account

The most expensive mistake and the most common one. Every personal purchase on the company card, every transfer to your personal account "just for now", every Amazon order that wasn't for the business — it all lands on the DLA. Small amounts add up. A few hundred pounds a month of mixed spending can push the DLA past £10,000 before you notice, triggering both the BIK charge and, if left unresolved, the s.455 charge.

Ignoring the DLA until year-end

Many directors only discover their DLA balance when their accountant prepares the annual accounts — months after the year has ended. By then, the options are limited: you either find the cash to repay, or the company pays the 33.75% charge. Checking quarterly (or monthly, if you're active on the account) gives you time to course-correct with dividends or smaller repayments.

Declaring dividends without distributable profits

Offsetting the DLA with a dividend only works if the company genuinely has distributable profits — accumulated realised profits less accumulated realised losses (Companies Act 2006, s. 830). If you declare a dividend when profits don't support it, it's an unlawful distribution. The director who knew or ought to have known must repay it, and you're back to an overdrawn DLA with less time to fix it.

Falling into the bed-and-breakfasting trap

Repaying the loan on 28 December and re-borrowing on 5 January is not a repayment in HMRC's eyes. If the re-borrowed amount is £5,000 or more and falls within 30 days, HMRC disregards the repayment entirely. Some founders do this inadvertently — they repay the DLA from a personal account, then a few weeks later take a "small" advance for a deposit or a tax bill. If it's £5,000 or more, the s.455 charge snaps back.

Forgetting the P11D when the loan crosses £10,000

The £10,000 BIK threshold applies at any point during the tax year, not just at year-end. If you borrowed £15,000 in June and repaid it in July, the BIK still applies for the period the balance was above £10,000. Missing the P11D filing means the company owes Class 1A NI on an amount it never reported, and you owe income tax on a benefit you never declared. HMRC charges interest and penalties on both.

DLA and your other tax obligations

The director's loan account doesn't exist in isolation. It interacts with several other tax obligations that every UK limited company director needs to manage:

Corporation Tax

The s.455 charge is paid alongside your normal Corporation Tax — same deadline, same payment process. Current Corporation Tax rates are 25% on profits over £250,000, 19% for profits up to £50,000, and marginal relief in between. The s.455 charge sits on top of this.

Self Assessment

As a director, you must report any benefit in kind from an overdrawn DLA on your Self Assessment tax return. You'll also report dividends used to clear the DLA — those are taxable income at dividend rates (10.75%, 35.75%, or 39.35% for 2026/27).

PAYE and payroll

If you clear the DLA with a salary bonus, that bonus runs through PAYE. The company deducts income tax and employee NI at source, and pays employer NI on top. For a higher-rate taxpayer, the combined cost of clearing a £20,000 DLA via bonus can reach £10,000 or more in tax and NI — often more expensive than the dividend route.

Optimal salary-and-dividend strategy

Most directors pay themselves a salary up to the NI threshold and dividends above that. A well-managed DLA fits into this strategy: personal expenses stay out of the company account, withdrawals beyond salary and dividends are minimised, and any short-term borrowing is repaid well before the deadline.

When you lend money to the company

Not every DLA balance is a problem. If you've put personal money into the company — whether as start-up capital, a cash injection during a quiet period, or to cover an expense you paid personally — the DLA is in credit and the company owes you.

In this scenario:

• The company can repay you at any time, tax-free. It's your own money coming back.
• You can charge the company interest on the balance. The interest is a deductible expense for the company (reducing its Corporation Tax bill) but taxable income for you. The company must deduct 20% income tax at source and report the interest to HMRC on form CT61.
• If you don't charge interest, there's no tax consequence — it's simply a loan at 0% from you to the company.

Lending money to your company is a common and perfectly legitimate way to fund a growing business. Just keep clear records so there's no confusion about whether the balance is in credit or overdrawn.

Record-keeping and compliance

Good DLA management depends on good records. Here's what you need to maintain:

• A dedicated DLA in your accounting software. Xero, QuickBooks, FreeAgent — all allow you to set up a director's loan account. Every personal withdrawal, expense reimbursement, dividend offset, and repayment should be coded to this account.
• Bank statements showing transfers. HMRC may ask for evidence that repayments were genuine bank transfers, not just journal entries.
• Board minutes for dividends. If you offset the DLA with dividends, the board resolution and dividend vouchers must be on file.
• P11D records. Keep a copy of every P11D filed, along with the calculation of the benefit in kind.
• CT600A filings. The supplement to your Corporation Tax return that declares the loan position. Your accountant files this, but make sure it's done.

These records sit alongside the statutory registers every UK limited company must maintain. Accounting records must be retained for at least six years from the end of the accounting period — and DLA records are part of that.

Directors' duties and the DLA

As a director, you owe the company statutory duties under ss. 171–177 of the Companies Act 2006. Several of these are directly relevant to how you manage a director's loan account:

• Duty to promote the success of the company (s. 172): drawing down a large loan that the company cannot afford to lose is potentially a breach. You must consider the impact on the company's cash flow and its ability to pay creditors.
• Duty to exercise reasonable care, skill and diligence (s. 174): ignoring the DLA balance, missing the s.455 deadline, or failing to track personal withdrawals falls below the standard expected of a reasonable director.
• Duty to avoid conflicts of interest (s. 175): you're on both sides of a director's loan — borrower and decision-maker. You should disclose the loan to the board (even if you are the sole director, record the decision) and ensure it's properly authorised.
• Duty to declare interest in transactions (s. 177): a director's loan is a transaction between you and the company. Declare your interest in it.

If the company later becomes insolvent and there's an outstanding DLA, a liquidator can pursue the director personally for the balance. The loan may also be scrutinised under wrongful trading (s. 214 Insolvency Act 1986) if the director continued to draw money while knowing (or should have known) the company could not avoid insolvency.

Frequently asked questions

What happens if I don't repay my director's loan?

If the loan remains outstanding nine months and one day after the company's year-end, the company pays a s.455 Corporation Tax charge of 33.75% on the balance. You may also owe income tax on the benefit in kind if the balance exceeded £10,000 at any point. If the company is wound up with the loan still outstanding, the liquidator can pursue you personally for the full amount.

Can I borrow from my company interest-free?

Yes, but if the loan exceeds £10,000 at any point during the tax year, the difference between what you pay in interest and the HMRC official rate (currently 3.75%) is treated as a taxable benefit in kind. Below £10,000, you can borrow interest-free with no BIK consequences — though the s.455 charge still applies if it's not repaid by the deadline.

Is the s.455 tax refundable?

Yes. When you repay the loan (or the company writes it off), the company can reclaim the s.455 tax. However, HMRC doesn't process the refund until nine months and one day after the end of the accounting period in which the loan was repaid. You can claim within four years. Claims within two years go on the CT600A; later claims use form L2P.

Does the DLA apply to all directors or just director-shareholders?

The s.455 charge specifically applies to loans to participators — broadly, shareholders and their associates. A director who holds no shares (and isn't connected to a shareholder) isn't a participator, so s.455 wouldn't apply to them. However, an interest-free loan to any director exceeding £10,000 is still a benefit in kind for P11D purposes.

Can I offset expenses I've paid personally against the DLA?

Absolutely. If you've paid for legitimate business expenses out of your own pocket — travel, subscriptions, equipment — the company owes you that money. Credit it to the DLA and it reduces (or reverses) the overdrawn balance. Keep receipts and ensure each expense is a genuine allowable business expense.

What if there are multiple directors with loan accounts?

Each director-shareholder has their own separate DLA. The s.455 charge, BIK rules, and reporting obligations apply individually to each one. You can't offset one director's credit balance against another's overdrawn balance — they're separate accounts with separate tax consequences.