Director's Loan Accounts: The Hidden Tax Trap Inside Your Own Company

Most limited company directors have dipped into the business account at some point. Maybe it was to cover a quick personal expense, plug a cash gap at home, or tide you over until the next dividend lands. It feels harmless. After all, it's your company.

HMRC sees it differently. Any money you take out of the company that isn't salary, a reimbursed expense, or a properly declared dividend goes straight into what's called a Director's Loan Account. Get it wrong and it can trigger a surprisingly nasty set of tax charges.

Here is what every UK limited company director needs to understand about DLAs heading into the 2026/27 tax year.

What Is a Director's Loan Account?

A Director's Loan Account (DLA) is simply a running record of everything that moves between you personally and your limited company that isn't pay, expenses, or dividends. When you put money in, the company owes you. When you take money out, you owe the company.

If the account is in credit (the company owes you), that's fine. It just means the company can pay you back tax free when cash allows. The trouble starts when the account is overdrawn and you personally owe the company.

The £10,000 Rule: Beware the Benefit in Kind

HMRC treats an overdrawn DLA like any other loan. If at any point in the tax year you owe your company more than £10,000, the outstanding balance is classed as a benefit in kind. That means extra income tax for you and extra Class 1A National Insurance for the company.

The benefit is calculated using HMRC's official rate of interest. From 6 April 2025 that rate is 3.75%, up from 2.25% the year before. So if you owed the company £30,000 interest free for a full tax year, you would be taxed on around £1,125 of notional interest as if it were extra income.

You can avoid the benefit in kind charge altogether by doing one of two things: keep the balance below £10,000 at all times, or pay the company interest at the official rate on the full outstanding amount. The interest the company receives then sits as taxable income in its accounts.

The 9 Month Deadline and the 33.75% S455 Charge

The more painful charge is the Section 455 tax, named after the part of the Corporation Tax Act 2010 that created it. If your DLA is still overdrawn nine months and one day after the end of your company's accounting period, the company has to pay 33.75% of the outstanding balance to HMRC on top of its normal Corporation Tax.

This isn't pocket change. On a £40,000 overdrawn balance, S455 tax adds up to £13,500 that the company has to find and send to HMRC. The charge is temporary in theory, but it still ties up cash that most small companies can't afford to lose.

You can reclaim the S455 tax in full once the loan is repaid (or written off, see below). The reclaim sits under Section 458, and the company has four years from the end of the accounting period in which the loan was repaid to make the claim. HMRC won't volunteer the refund. You have to ask for it.

The Bed and Breakfast Trap

A reasonable question at this point is: why not just repay the loan on the last day of the accounting period and borrow it again the next day?

HMRC saw that coming. The bed and breakfast rules have been in force since 2013. If a repayment of £5,000 or more lands within a 30 day window around a fresh advance, the two are matched and the repayment is ignored for S455 relief purposes.

There are wider rules too, which can catch repeated patterns of loans and repayments even outside the 30 day window. Trying to dodge the S455 charge with quick turnaround repayments is usually a bad idea and can look like deliberate avoidance.

Writing the Loan Off: Tempting but Expensive

Sometimes it becomes clear that a director simply isn't going to repay the loan, and the company writes it off. That waives the debt, but the tax doesn't disappear. HMRC treats a written off directors' loan as a distribution, so the director pays dividend tax on it at their marginal rate.

The company can reclaim the S455 charge once the write off is formally made, but Class 1 National Insurance usually applies too. Written off loans rarely turn out to be the bargain they first appear on paper.

How to Clear an Overdrawn DLA Sensibly

If you find yourself overdrawn with the clock ticking towards your year end deadline, you have a few clean options:

1. Pay cash back in from personal funds before the 9 month post year end deadline.

2. Declare a dividend (only where the company has enough distributable reserves) and use it to clear the balance.

3. Pay an additional bonus through PAYE and use the net amount to clear the loan. This is usually the most expensive route but sometimes the only one available.

4. Net the DLA against credit balances elsewhere if there are legitimate amounts owed to you.

The right answer depends on your total personal income, your company's profits, and whether reserves are available. It's rarely a decision to leave until the last minute.

The Bottom Line

Director's Loan Accounts are not dangerous in themselves. They are a normal feature of how owner managed companies work. What catches people out is treating the company bank account like a personal wallet and forgetting that every pound taken out creates a tax position somewhere.

Keep a monthly eye on the DLA balance. If it drifts above £10,000, plan how to bring it down or accept the benefit in kind and budget for it. If year end is approaching and the balance is still red, speak to your accountant early. The cost of fixing a DLA a few months after year end is always cheaper than the S455 charge nine months later.

At YF Accounting we review every client's DLA position before signing off year end accounts, because waiting for HMRC to tell you there's a problem is never the best plan. If you'd like a second set of eyes on yours, get in touch.