This is one of those topics that sounds technical until it isn’t — it’s just “I took some money out of the company and I’ll sort it out later.” That’s exactly how an overdrawn director’s loan account starts, and it’s one of the most common, avoidable tax bills we see owner-managed businesses walk into.

What a director’s loan account actually is

Every time you take money out of your company that isn’t salary, dividend, or a reimbursed business expense, it gets recorded in your director’s loan account (DLA). If you take out more than you’ve put in, the account is overdrawn — in plain terms, you owe the company money.

That’s not automatically a problem. Plenty of directors run an overdrawn DLA for short periods, particularly around quieter cash-flow months. The problem starts when it isn’t cleared in time.

The deadline that matters: nine months and one day

If your director’s loan isn’t repaid within nine months and one day after your company’s accounting year end, your company faces a tax charge under Section 455 of the Corporation Tax Act 2010 — known simply as S455 tax.

The rate is currently 33.75% of the outstanding balance for loans made before 6 April 2026, rising to 35.75% for loans made on or after that date, following the Autumn Budget 2025 increase to the higher dividend tax rate (S455 is deliberately pegged to it). So if you borrow £20,000 from your company and it’s still sitting unpaid past the deadline, your company could be looking at a charge of roughly £6,750 to £7,150 — paid alongside your normal Corporation Tax bill, via the CT600A supplementary pages.

Here’s the genuinely confusing part: the company pays this, not you personally. It’s a charge designed to stop directors extracting profit through “loans” rather than paying themselves properly through salary or dividends, where the appropriate tax would otherwise apply.

Can S455 tax be reclaimed?

S455 tax is technically temporary. Once the loan is fully repaid, written off, or converted into a dividend, the company can reclaim what it paid. The catch is the timing: you can’t claim it back immediately. If you repaid the loan after the original nine-month deadline, the reclaim has to go through a separate process (form L2P), and the cash can be locked up with HMRC for the better part of a year before it comes back. That’s a real cash-flow cost even when the tax itself is eventually refunded.

There’s also a specific trap HMRC watches closely, known as “bed and breakfasting.” If you repay a loan just before the deadline and then take a similar amount back out again within 30 days, HMRC will typically treat the original loan as never having been repaid at all, and the S455 charge will still apply. This catches out directors who think they’ve found a clever workaround — they haven’t; it’s a well-known pattern HMRC specifically legislated against.

There’s also a personal tax angle

Even if you avoid S455 entirely by repaying on time, an overdrawn DLA above £10,000 can still trigger a benefit-in-kind if you’re not paying interest at HMRC’s official rate (currently 3.75%, from 6 April 2025). That can mean additional Class 1A employer National Insurance for the company and a personal tax charge for you — a separate issue from S455 that’s easy to overlook if you’re only watching the nine-month clock.

What we’d actually check with you

If you suspect your DLA might be running overdrawn — or you just haven’t looked at it properly since your bookkeeping went out of date — here’s the practical sequence:

1. Confirm the live balance. Not the figure from your last set of accounts — the actual current position, including drawings since then.
2. Work out your real deadline. Nine months and one day after your year end, marked clearly, not approximately.
3. Decide how to clear it properly, whether that’s a genuine cash repayment, a dividend (only if there are sufficient distributable reserves — this matters and gets checked, not assumed), or a documented mix of both.
4. Paper it properly. Board minutes, dividend vouchers, and clean bank narratives. A messy paper trail creates more problems at HMRC compliance review than the loan itself.
5. Set a forward policy, so this isn’t an annual scramble. Most overdrawn DLAs happen because bookkeeping runs months behind real-time drawings, not because anyone intended to borrow heavily from the business.

The takeaway

S455 tax is entirely avoidable with planning, and entirely real if you ignore it. With the rate rising to 35.75% on new loans from April 2026, and dividend tax also increasing, the gap between getting your remuneration structure right and getting it wrong is widening. If you haven’t checked your DLA balance recently, that’s worth five minutes before your next board meeting.

Northwyn works with directors of owner-managed companies on remuneration planning, bookkeeping oversight, and year-end compliance. If you’d like us to take a look at your director’s loan position, book a Discovery Call.

FAQuestions

What is an overdrawn director’s loan account?

An overdrawn director’s loan account arises when a director has taken more money out of the company than they have introduced or been entitled to receive through salary, dividends, or expenses.

How long do I have to repay a director’s loan?

The loan generally needs to be repaid within nine months and one day of the company’s accounting year end to avoid an S455 tax charge.

Can I clear a director’s loan with dividends?

Potentially, yes. However, the company must have sufficient distributable profits available and the dividend must be properly documented.

What happens if I don’t repay the loan?

The company may face an S455 tax charge and there may also be benefit-in-kind implications if the balance exceeds the relevant thresholds.

Does HMRC check director’s loan accounts?

Yes. Director’s loan accounts are a common area reviewed during compliance checks because they can affect Corporation Tax, personal tax, and benefit-in-kind reporting.