Borrowing from your own limited company feels harmless, since it is your company after all. HMRC disagrees the moment that borrowing stays unpaid too long. An overdrawn director’s loan account can trigger a Corporation Tax charge, a personal benefit-in-kind bill, and an awkward conversation with your accountant at year-end. This guide explains how director’s loan accounts work, the current Section 455 tax rate, and how to avoid an unnecessary charge.
Quick Answer
A director’s loan account records money a director borrows from, or lends to, their limited company outside of salary, dividends and expense reimbursements. If the account is overdrawn and not repaid within 9 months and 1 day of the company’s year-end, the company pays Section 455 tax at 35.75% on the outstanding balance for loans made on or after 6 April 2026. If the overdrawn balance exceeds £10,000 at any point, a separate personal benefit-in-kind charge can also apply.
What Is a Director’s Loan Account?
A director’s loan account, or DLA, is a running ledger, not a real bank account, that tracks money moving between a director personally and their limited company outside of normal salary, dividends and reimbursed business expenses. If a director takes out more than they have put in or been formally paid, the account becomes overdrawn, meaning the director effectively owes the company money.
The 9-Month Rule and Section 455 Tax
If a director’s loan account is overdrawn at the company’s year-end and the balance is not repaid within 9 months and 1 day of that year-end, the company must pay Section 455 tax, named after the relevant section of the Corporation Tax Act 2010, on the outstanding amount.
| When the Loan Was Made | Section 455 Rate |
|---|---|
| Before 6 April 2022 | 32.5% |
| 6 April 2022 to 5 April 2026 | 33.75% |
| On or after 6 April 2026 | 35.75% |
The Section 455 rate moves automatically in line with the dividend upper rate, so when the higher dividend rate rose to 35.75% from 6 April 2026, Section 455 rose with it. Which rate applies depends on when the loan was actually drawn, not when the 9-month deadline falls.
Worked Example
A company has a year-end of 31 March 2027. A director draws a £30,000 loan in June 2026, on top of their normal salary and dividends. At the 31 March 2027 year-end, the DLA shows £30,000 overdrawn. The deadline to repay is 1 January 2028. If the balance is still outstanding on that date, the company owes Section 455 tax of £10,725, calculated as £30,000 multiplied by 35.75%.
Section 455 Tax Is Refundable
Unlike most Corporation Tax charges, Section 455 tax is not a permanent cost if the loan is eventually repaid. Once the director repays, releases, or has the loan written off, the company can reclaim the Section 455 tax using form L2P, though the refund is paid separately from the normal Corporation Tax cycle and generally follows the same 9-month timing logic relative to when the loan was cleared.
The £10,000 Benefit-in-Kind Threshold
A separate rule applies if the director’s loan balance exceeds £10,000 at any point during the tax year, regardless of whether it is repaid by the 9-month deadline. Once that threshold is crossed, HMRC treats the arrangement as a cheap or interest-free employment-related loan.
- If the company does not charge interest at or above HMRC’s official rate, currently 3.75% for 2026/27, the interest shortfall is treated as a taxable benefit in kind
- The benefit must be reported on the director’s P11D, with the company paying 15% Class 1A National Insurance on the benefit value
- The director pays personal Income Tax on the benefit through Self Assessment
If the maximum balance stays under £10,000 throughout the tax year, this benefit-in-kind charge does not apply, though Section 455 still can if the balance is overdrawn at year-end.
Bed and Breakfasting: The Anti-Avoidance Rule
HMRC specifically targets the practice of repaying a loan just before the 9-month deadline, then redrawing a similar amount shortly afterwards, commonly called bed and breakfasting. Anti-avoidance rules disregard repayments where more than £5,000 is redrawn within 30 days of repayment, or where arrangements exist at the time of repayment to redraw a similar amount later. A genuine, permanent repayment, or one funded by a formally declared dividend or bonus, does not fall foul of these rules.
How to Avoid an Unnecessary Section 455 Charge
- Monitor the DLA balance throughout the year, not just at the year-end statutory accounts stage
- Clear an overdrawn balance with a formally declared dividend or bonus rather than an informal transfer, provided the company has sufficient distributable profit
- If charging interest, set it at or above the current official rate to avoid the benefit-in-kind charge on balances over £10,000
- Avoid repaying and quickly redrawing a similar amount, since this can be disregarded under the bed and breakfasting rules
- Speak to your accountant well before the 9-month deadline, not after it has passed
Understanding how salary and dividends interact with a DLA is easier once you understand the wider picture of how directors are typically paid. Our guide to dividends vs salary in the UK covers how these payment methods work alongside a director’s loan account.
Frequently Asked Questions
What is the current Section 455 tax rate?
35.75% for loans made on or after 6 April 2026. Loans made between 6 April 2022 and 5 April 2026 remain at 33.75% unless redrawn or extended.
How long do I have to repay an overdrawn director’s loan?
Within 9 months and 1 day of the company’s accounting year-end to avoid a Section 455 tax charge.
Is Section 455 tax refundable?
Yes, once the loan is repaid, released, or written off, the company can reclaim the tax paid using form L2P.
Does a director’s loan under £10,000 have any tax implications?
If it stays under £10,000 throughout the tax year, the benefit-in-kind charge does not apply, though Section 455 can still apply if the balance remains overdrawn at year-end.
What is bed and breakfasting for director’s loans?
Repaying a loan shortly before the deadline and redrawing a similar amount soon after. HMRC’s anti-avoidance rules can disregard such repayments if more than £5,000 is redrawn within 30 days.
Key Takeaways
- Section 455 tax applies at 35.75% on loans made on or after 6 April 2026 that remain overdrawn 9 months and 1 day after year-end
- Section 455 tax is refundable once the loan is repaid, released or written off
- Loans over £10,000 without adequate interest can trigger a separate benefit-in-kind charge
- Bed and breakfasting, repaying then quickly redrawing, is specifically targeted by anti-avoidance rules
- Clearing an overdrawn balance with a formally declared dividend avoids the charge entirely
About the Author
This guide was prepared by the Business Mine editorial team, who research and write practical UK business, tax and finance guides. Information is checked against current HMRC guidance at the time of publication. This article is provided for general information only and does not constitute tax advice; for advice specific to your circumstances, consult a qualified accountant.
