2. September 2026

Overdrawn Director’s Loan Account: What Directors Need to Know

Article written by PR Accountants LTD in the category Limited Companies

Introduction

Taking money from your own limited company can feel informal. You may transfer funds to your personal bank account, use the company card for a private purchase or ask the company to pay a personal bill. If the payment is not salary, a dividend, repayment of business expenses or money the company already owes you, it will usually be recorded in your director’s loan account.

That accounting entry matters.

If you have taken more from the company than you have put in, the account becomes overdrawn. In legal and tax terms, you owe money to the company. The fact that you founded the business, own all its shares or are its only director does not make the company’s money your personal money. A limited company is a separate legal person.

An overdrawn director’s loan account is not automatically prohibited and it does not always create an immediate tax bill. However, it can lead to:

a section 455 Corporation Tax charge for the company;
interest on a late section 455 payment;
a benefit in kind for the director;
employer’s Class 1A National Insurance;
Income Tax and Class 1 National Insurance if a loan is written off;
disclosure in the company’s accounts and tax return;
Companies Act approval requirements;
cashflow pressure; and
personal recovery action if the company becomes insolvent.

The rules also overlap. Repaying the balance before the section 455 deadline does not necessarily remove a benefit-in-kind charge. Paying a dividend to clear the account only works if the company has sufficient distributable profits and the dividend is properly declared. Repaying a loan briefly and borrowing the money again may be caught by anti-avoidance rules.

This guide explains what UK company directors need to know and how to deal with an overdrawn account before it becomes a larger problem.

Important: This article is general information for UK owner-managed companies. Director’s loan accounts are fact-sensitive, and tax rates and reporting rules can change. Advice should be based on the company’s records, the dates of each transaction and the director’s circumstances.

What is a director’s loan account?

A director’s loan account is an accounting record of money moving between a director and their company outside normal salary, dividends and reimbursed business expenses.

The account may be:

In credit: the company owes money to the director. This might happen because the director introduced capital, paid company expenses personally or lent cash to the business.
Nil: neither party owes the other anything.
Overdrawn or in debit: the director owes money to the company because they have taken out more than the company owes them.

For example, suppose you lend your company £15,000 to help it through a quiet period. Your director’s loan account is £15,000 in credit. If the company later pays £5,000 back to you, the credit falls to £10,000. That repayment is normally not salary or a dividend because the company is simply returning part of your loan.

Now suppose you withdraw a further £13,000. The first £10,000 uses the remaining credit. The extra £3,000 creates an overdrawn balance. You now owe the company £3,000.

The tax outcome depends on the running balance and the nature and date of every transaction, not just the label attached to one bank payment.

How does an overdrawn director’s loan account arise?

An overdrawn balance often builds gradually rather than through one deliberate loan agreement. Common causes include:

personal transfers from the company bank account;
private purchases made with a company debit or credit card;
personal tax, mortgage or household bills paid by the company;
cash drawings taken instead of salary;
dividends taken before they have been validly declared;
dividends that exceed the company’s available distributable profits;
private elements of travel, entertainment, telephone or other costs;
unsupported expense claims;
tax payments made on the director’s behalf;
journals posted during year-end bookkeeping; and
transactions allocated to the wrong director or the wrong company.

Poor records can make the position worse. A director may believe every withdrawal was a dividend while the bookkeeping software records it as a loan. Alternatively, an accountant may discover at year-end that there were not enough distributable reserves to support the dividends the director thought they had taken.

The correct treatment depends on what legally happened at the time. A payment can be treated as salary if there was a genuine remuneration decision and it was processed through payroll. It can be a dividend if the company had sufficient distributable profits and followed the proper company procedures. It can be an expense reimbursement if the director incurred a genuine business expense and has evidence for it.

It is not normally acceptable to backdate paperwork or rewrite the history after the tax consequences become inconvenient.

Why is the balance more than an accounting technicality?

The balance shown in the accounts represents an asset belonging to the company. If the director owes £40,000, the company has a £40,000 debtor, subject to questions such as recoverability.

This has several consequences.

First, the director cannot assume the debt disappears because they own the company. Shareholders own shares in the company; they do not own the company’s bank balance or individual assets directly.

Second, an overdrawn balance may make the company appear more solvent than it is if the director cannot actually repay it. The accounts may show a current asset, but that asset is only valuable if it can be recovered.

Third, if the company enters liquidation, an insolvency practitioner may demand repayment. The director’s personal financial position then becomes highly relevant.

Finally, the balance can have tax consequences for both the company and the director, even where everyone regarded the withdrawal as temporary.

Which companies and borrowers are caught by section 455?

The special company tax charge is commonly called a section 455 charge because it arises under section 455 of the Corporation Tax Act 2010.

It generally applies when a close company makes a loan or advance to a participator, or to an associate of a participator, and the balance remains outstanding beyond the relevant deadline.

Most small owner-managed companies are close companies. Broadly, a close company is one controlled by five or fewer participators, or by any number of participators who are directors. A participator is usually a shareholder, although the statutory definition is wider.

This means the rule is not triggered merely because a person has the job title “director”. It is particularly relevant where the borrower is both a director and a shareholder. Loans to certain associates, such as family members or connected entities, may also be caught.

There is a limited exception for certain full-time employees where the total loans do not exceed £15,000 and the borrower does not have a material interest in the company. Most directors who own or control an owner-managed company will not qualify. HMRC’s guidance on the employee exception sets out the conditions.

What is the section 455 tax charge?

If a relevant loan is still outstanding nine months and one day after the end of the company’s Corporation Tax accounting period, the company may have to pay a section 455 charge.

The charge is paid by the company, not the director. It is separate from the company’s ordinary Corporation Tax on profits. It can arise even if the company made a trading loss and has no ordinary Corporation Tax to pay.

Section 455 is designed to discourage shareholders from extracting company funds as long-term loans instead of taking taxable salary or dividends. It is often described as a temporary tax because the company can claim relief after the loan is genuinely repaid, released or written off. However, the cashflow cost can be significant and any late-payment interest is not refunded.

The rate changed from 6 April 2026

The applicable rate is linked to when the loan or benefit was made, not simply the company’s year-end.

Loans made from 6 April 2022 to 5 April 2026 are generally charged at 33.75%.
Loans made or benefits conferred on or after 6 April 2026 are generally charged at 35.75%.
Older advances may retain an earlier rate.

HMRC’s current section 455 rate guidance confirms the historic rates and the 35.75% rate from 6 April 2026.

This can produce a mixed-rate balance. If a director’s loan account contains advances made before and after 6 April 2026, the company should not simply multiply the entire year-end balance by 35.75%. The transaction history, repayments and matching rules need to be reviewed.

HMRC has also announced a temporary online filing issue. Its Corporation Tax service is not expected to calculate the new 35.75% rate correctly until 6 April 2027. A company filing before the service is updated may need to amend its return after that date. Directors and advisers should check the current position in HMRC’s Corporation Tax online service update.

When must the loan be repaid to avoid the cash charge?

The key deadline is nine months and one day after the end of the Corporation Tax accounting period in which the loan was outstanding.

For a company with a 31 December 2026 year-end, the normal section 455 payment deadline is 1 October 2027. If the relevant balance is permanently repaid, released or written off by that date, relief can normally be given before the charge is paid.

The deadline is based on the company’s accounting period, not the tax year and not nine months after the day the director took the money.

If the company has changed its accounting date or has an accounting period longer than 12 months, it may have more than one Corporation Tax accounting period. The calculation then needs extra care.

HMRC’s section 455 timing guidance explains that the due date follows the company’s mainstream Corporation Tax payment date.

A practical section 455 example

Assume a company has a 31 December year-end. Its director and sole shareholder withdraws £30,000 in May 2026. The money is still owed at 31 December 2026.

Because the advance was made after 5 April 2026, the section 455 rate is 35.75%. If no relief is available, the company’s charge is:

£30,000 x 35.75% = £10,725

The relevant deadline is 1 October 2027.

If the director permanently repays the £30,000 on 20 September 2027, the company can normally obtain relief before the payment deadline. The loan may still need to be reported on the company tax return and supplementary CT600A pages.

If the director repays it on 15 December 2027, the payment was late for section 455 purposes. The company may have to pay the £10,725 charge plus late-payment interest. Relief is then deferred until nine months and one day after the end of the accounting period in which the repayment occurred. If that period ends on 31 December 2027, the earliest normal repayment date is 1 October 2028.

This delay is important. The company does not receive the section 455 money back immediately after the director repays the loan.

Is section 455 an additional permanent tax cost?

Not usually, provided the loan is later genuinely repaid, released or written off and the company makes a valid claim for relief.

However, “temporary” should not be confused with “harmless”. The company may still suffer:

an immediate cash outflow at 33.75%, 35.75% or another historic rate;
late-payment interest if the charge was paid after the due date;
a long wait before relief becomes repayable;
administrative work to submit or amend claims;
personal tax and National Insurance consequences for the director;
professional fees; and
insolvency or governance risks.

The section 455 payment is not a way to buy the right to keep company money permanently. The underlying debt still exists unless it is repaid, lawfully released or written off.

How does the company recover section 455 tax?

The company can normally claim relief when the loan is repaid, released or written off. The timing depends on when that event occurs.

If it occurs within nine months of the end of the accounting period in which the loan arose, relief can generally be given before the section 455 charge is paid.

If it occurs later, the relief does not become due until nine months and one day after the end of the accounting period in which the repayment, release or write-off took place.

The relief is not automatic in every case. The company must make a claim, usually through the CT600A, an amended company tax return or HMRC’s L2P procedure, depending on the date and circumstances. HMRC states that claims generally need to be made within four years. HMRC’s director’s loan repayment guidance explains the routes and deadlines.

Any interest charged because the section 455 tax was paid late is not repaid when the principal tax is relieved.

Do short-term repayments solve the problem?

Not necessarily.

Some directors try to repay a loan shortly before the nine-month deadline and borrow the money again shortly afterwards. This is often called “bed and breakfasting”. Specific anti-avoidance rules can match the repayment with the new borrowing, leaving the older loan exposed to section 455.

The 30-day rule

Broadly, if repayments of £5,000 or more are made and new loans or advances of £5,000 or more are taken within a 30-day period, the repayment may be matched with the new borrowing rather than the old balance.

HMRC’s guidance on the 30-day rule provides the detailed ordering rules and examples.

The arrangements rule

A separate rule can apply where at least £15,000 was outstanding before a repayment and arrangements existed for the director to receive at least £5,000 in further loans or advances. This rule can apply even when the new advance falls outside the 30-day window.

HMRC’s guidance on the arrangements rule explains its scope.

The practical point is simple: a repayment should be real and lasting. Moving money temporarily, using circular transactions or arranging a fresh loan in advance may not produce the intended relief.

Can a dividend be used to clear the director’s loan?

Often, yes, but only if the company can lawfully pay the dividend.

If a director is also a shareholder, a properly declared dividend can be credited to the director’s loan account instead of being paid in cash. That credit reduces the amount owed to the company.

Several conditions matter:

the company must have sufficient distributable profits at the date of the dividend;
the directors should review up-to-date accounts before declaring it;
the dividend must follow the rights attached to the relevant shares;
board minutes and dividend vouchers should be prepared;
the entry must be made on the actual declaration or payment date; and
the shareholder must report and pay any personal dividend tax due.

A dividend cannot be backdated to make a historic loan disappear. It also cannot be declared simply because the company has cash in the bank. Cash and distributable profit are not the same thing.

If the company has several shareholders holding the same class of shares, a dividend will normally need to follow their equal rights. Waivers and alphabet-share arrangements require care. The company should not assume it can declare a dividend for one director alone.

An unlawful or unsupported dividend may remain a debt due from the director, so using poor paperwork to solve one problem can create another.

Can salary or a bonus clear the balance?

Salary or a bonus can be credited to the director’s loan account, but it must be genuine remuneration and processed correctly through payroll.

PAYE Income Tax and employee’s National Insurance may be deducted. The company may also pay employer’s National Insurance. This means the net amount credited to the account is usually less than the gross salary or bonus.

For example, a £20,000 gross bonus will not usually clear a £20,000 loan. After payroll deductions, only the net pay credited to the director may reduce the balance. The company must also fund the PAYE and National Insurance due to HMRC.

The company should consider:

the director’s marginal Income Tax rate;
employee’s and employer’s National Insurance;
available Employment Allowance, where relevant and eligible;
the company’s Corporation Tax deduction for genuine remuneration;
payroll reporting deadlines; and
whether the remuneration is commercially and legally supportable.

Salary can sometimes be more expensive than a dividend, but a dividend requires distributable profits. The right solution depends on the full position, not just the desire to remove the loan before a deadline.

Can the director simply repay the money?

Yes. A personal bank transfer to the company is usually the cleanest solution, provided it is a genuine repayment from the director’s own funds and the money is not immediately borrowed again.

The payment reference should be clear, and the company should retain evidence. The bookkeeping entry should credit the director’s loan account rather than treating the receipt as sales income.

A director might also have legitimate business expenses that the company has not yet reimbursed. If properly evidenced, these can create a credit against the loan account. However, expenses must be genuine company costs. They should not be invented, inflated or reclassified simply to clear a debt.

Money owed by another company, another shareholder or a spouse cannot casually be offset against the director’s balance. Each legal person and each loan account should be reviewed separately.

Does a company pension contribution clear the loan?

No. An employer pension contribution is paid by the company to a registered pension scheme for the director’s benefit. It does not put money back into the company and does not normally create a credit on the director’s loan account.

Pension contributions may be valuable for wider remuneration and tax planning, but they are not a repayment of an overdrawn director’s loan account.

What happens if the loan is written off?

A company can sometimes formally release or write off a director’s loan, but this is not a tax-free cancellation.

Where a close company writes off a loan to a shareholder-director, the amount will normally be treated as the director’s dividend-type income for Income Tax purposes. Since 6 April 2016, the amount is not grossed up before being taxed. HMRC’s guidance on released close-company loans explains the interaction between the shareholder and employment rules.

For National Insurance purposes, a write-off can be treated as earnings and attract Class 1 National Insurance. This is different from the Class 1A National Insurance normally associated with the annual beneficial-loan benefit. HMRC’s National Insurance guidance outlines the distinction.

The company may be able to claim section 455 relief when the loan is formally released or written off. However:

the director may face a personal Income Tax bill;
the company may face Class 1 National Insurance;
proper corporate approval and accounting entries are required;
a release may be inappropriate if the company has creditors or solvency concerns; and
late-payment interest already charged on section 455 is not recoverable.

A journal entry described as “write off DLA” is not enough on its own. Legal, tax, accounting and solvency consequences should be reviewed before the company gives up an asset.

When does a beneficial-loan tax charge arise?

Section 455 is a company tax charge based mainly on whether a relevant loan remains outstanding after the company’s repayment deadline. The beneficial-loan rules are different. They consider whether an employee or director received cheap or interest-free credit during the tax year.

If the total outstanding loans to the director do not exceed £10,000 at any point in the tax year, a small-loan exemption may apply. If the total exceeds £10,000 at any time, the entire relevant loan can fall within the benefit calculation, not just the excess over £10,000.

The taxable benefit is broadly the interest calculated at HMRC’s official rate, less qualifying interest actually paid by the director. The exact result can be calculated using an averaging method or, in appropriate cases, a precise method based on daily balances.

The official rate is 3.75% from 6 April 2026. Since April 2025, HMRC can review the rate quarterly, so it may change on 6 April, 6 July, 6 October or 6 January. Always check HMRC’s current beneficial-loan official rates before completing the calculation.

The director normally pays Income Tax on the cash equivalent of the benefit. The company normally pays Class 1A National Insurance. For the 2026/27 tax year, the Class 1A rate is 15%. HMRC’s Class 1A guidance for 2026/27 confirms the rate.

A simple beneficial-loan example

Assume a director has an interest-free loan of £20,000 outstanding for the whole tax year. Using a 3.75% official rate, a simplified benefit calculation would be:

£20,000 x 3.75% = £750

The director pays Income Tax on the £750 benefit at their marginal rate. The company’s Class 1A National Insurance at 15% would be:

£750 x 15% = £112.50

The actual calculation may differ if the balance changed during the year, interest was paid, the official rate changed or the precise method applies.

Can the company charge interest instead?

Yes. Charging interest at no less than the relevant official rate may eliminate or reduce the taxable beneficial-loan amount, provided the arrangement is genuine and the interest is actually paid under the applicable rules.

Charging interest has other consequences:

the company records taxable interest income;
the director needs enough personal funds to make the payment;
the agreement, rate and payment dates should be documented;
changing official rates may require the arrangement to be reviewed; and
paying interest does not repay the principal or remove a section 455 charge.

Simply adding interest to the director’s loan account increases the amount owed. It does not necessarily count as interest paid by the director for benefit-in-kind purposes. Advice should be taken before relying on an accounting entry alone.

How are beneficial loans reported?

Unless the benefit is validly dealt with through an applicable payrolling arrangement, the company generally reports it on form P11D and reports its Class 1A National Insurance liability on form P11D(b).

The usual deadline is 6 July following the end of the tax year. Class 1A National Insurance is normally due by 22 July when paid electronically, or 19 July by cheque. Current dates and procedures are set out in HMRC’s expenses and benefits deadlines.

The beneficial-loan charge can arise even if the director repays the balance before the company’s year-end or before the section 455 deadline. If the loan exceeded £10,000 during the tax year, the period for which it was available still needs to be considered.

Conversely, a loan below £10,000 may avoid a beneficial-loan charge but still be subject to section 455 if the borrower is a participator and the balance remains outstanding. The tests should be reviewed separately.

Three thresholds that directors often confuse

Several rules use similar figures, but they have different purposes.

The £10,000 beneficial-loan threshold

This relates to the employment tax exemption for small loans. If total outstanding loans exceed £10,000 at any time in the tax year, a taxable benefit may arise.

The £10,000 Companies Act threshold

The Companies Act 2006 contains a minor-transaction exemption from shareholder approval for certain loans where the aggregate value does not exceed £10,000. This is a company-law rule, not the benefit-in-kind exemption.

The £15,000 section 455 employee exception

This is a narrower tax exception for certain full-time employees without a material interest in the company. A typical shareholder-director will not satisfy it.

Passing one threshold does not determine the treatment under the others. A £9,000 loan might avoid a beneficial-loan charge and fall within the Companies Act minor-transaction exemption, yet still create section 455 tax if it remains outstanding after the company’s deadline.

Does the loan need shareholder approval?

Under section 197 of the Companies Act 2006, a company generally must not make a loan to one of its directors, or give certain guarantees or security, unless the transaction has been approved by the members.

Section 207 of the Companies Act 2006 provides a minor-transaction exception where the aggregate value does not exceed £10,000. Other exceptions may apply in particular circumstances.

Where approval is required, members should normally receive information about:

the nature of the transaction;
the amount of the loan;
its purpose; and
the extent of the company’s liability.

An owner-director may think shareholder approval is a formality because they hold all the shares. The legal roles are still distinct. The decision and resolution should be documented in the correct capacity and at the correct time.

Failure to obtain approval can have legal consequences, including the transaction being voidable and potential liability for those involved. Company-law advice may be required for a significant or unusual loan.

Must the loan be disclosed in the annual accounts?

Director loans, advances, credits, guarantees and security can require disclosure in the company’s annual accounts. Section 413 of the Companies Act 2006 requires information such as the amount, interest rate, main conditions, amounts repaid and outstanding balance in relevant cases.

The requirement can apply to advances that existed at any point during the financial year, not only those outstanding at the year-end. A repayment shortly before the balance sheet date therefore does not automatically remove the disclosure issue.

The precise disclosures depend on the applicable accounting framework and the circumstances. Each director should normally have a separate loan account so the balances and transactions can be identified clearly.

What needs to be reported on the company tax return?

A close company with a relevant loan to a participator will normally need to complete the loans-to-participators supplementary pages, CT600A, with its company tax return.

This can be necessary even when the loan was repaid within nine months and no section 455 cash payment is ultimately due. The return records the loan and the relief being claimed.

The company should retain:

a detailed transaction-by-transaction loan account;
evidence of repayments;
dividend minutes and vouchers;
payroll records for salary or bonuses;
loan agreements and interest calculations;
shareholder resolutions where required;
P11D and P11D(b) records where relevant; and
the working showing which section 455 rate applies to each advance.

A single year-end figure is often insufficient, particularly when the balance changed during the year, crossed the £10,000 benefit threshold or includes loans made on both sides of 6 April 2026.

What if the director’s account moves in and out of credit?

The running balance matters. If the director pays company costs personally or introduces cash, those credits may reduce an existing debit balance. Later withdrawals may create new advances.

This is especially important where the section 455 rate changed. Repayment matching and the statutory anti-avoidance rules can affect which part of a mixed balance remains outstanding.

It is also important not to combine unrelated balances without a legal basis. For example:

one director’s credit balance should not automatically be offset against another director’s debit;
a debt owed to one company should not be offset against a balance with another group company without a valid agreement;
a personal expense cannot be turned into a company expense merely because another business payment is owed; and
a proposed dividend should not be credited before it is validly declared.

Monthly bookkeeping makes these issues much easier to resolve than reconstructing a year of transactions after the accounts date.

What happens if the company becomes insolvent?

An overdrawn director’s loan account can become a serious personal issue when a company is insolvent or approaching insolvency.

The debt is an asset of the company. A liquidator or administrator may pursue the director for repayment so the money can be used for creditors. The director cannot assume the balance will be cancelled because the company has ceased trading.

Depending on the facts, an insolvency practitioner may examine:

when the withdrawals were made;
whether the company was solvent at the time;
whether dividends were lawful;
whether shareholder approval was obtained;
whether the director preferred their own interests over creditors;
whether the balance is recoverable; and
whether any repayment, release or set-off was valid.

Loans are often repayable on demand unless a properly documented agreement says otherwise. A director who has used the money for a house deposit, living costs or other illiquid assets may be unable to repay when demanded.

Directors’ duties also shift in emphasis when insolvency becomes probable. Creditor interests become increasingly important. Writing off a director’s debt or declaring a dividend in that situation can be particularly dangerous.

If a company cannot pay its debts, has significant tax arrears or is relying on further borrowing to survive, the directors should obtain insolvency and tax advice promptly. Do not wait for the year-end accounts.

What are the warning signs of a developing problem?

An overdrawn account deserves immediate attention if:

the balance is increasing every month;
personal spending is regularly paid from the company account;
the director relies on drawings because payroll is too low;
dividends are being taken without current profit information;
the company has insufficient cash to pay PAYE, VAT or Corporation Tax;
the balance has exceeded £10,000;
the section 455 deadline is approaching;
the director cannot repay from personal resources;
an earlier section 455 charge has never been reclaimed;
loans have been repaid and redrawn around reporting dates;
the company is loss-making or balance-sheet insolvent;
several companies or family members are involved; or
bookkeeping is months behind.

The worst time to discover the balance is after the nine-month deadline, during a sale due diligence exercise or when an insolvency practitioner asks for repayment.

How should directors manage loan accounts during the year?

Good control is simpler and cheaper than repairing the position later.

Keep personal and company spending separate

Use the company bank account and card only for company transactions. Pay private costs personally. Where mixed-use expenses are unavoidable, identify and post the private amount promptly.

Review the balance every month

Your bookkeeping report should show the running balance for each director. Check that transactions have been coded correctly and ask about anything unexpected.

Decide how you will be paid

Agree a sustainable mix of salary, dividends, expense reimbursement, pension contributions and genuine loan repayments. Avoid using unplanned drawings as a substitute for remuneration planning.

Check distributable reserves before dividends

Prepare reliable management accounts, especially if the company has had losses, unusual costs or large tax liabilities. Record dividend decisions properly.

Monitor both the tax year and company year-end

The beneficial-loan rules follow the tax year, while section 455 follows the company’s Corporation Tax accounting period. A calendar covering both avoids missed obligations.

Document genuine loans

For a deliberate loan, record the amount, purpose, interest rate, repayment schedule, security if any, approval and consequences of default. Ensure the terms are followed.

Plan before the deadline

Do not wait until nine months after the year-end. Review the balance when preparing the accounts, then model the cash and personal tax consequences of repayment, dividend, bonus or another lawful solution.

A practical year-end checklist

Before finalising the company’s accounts, directors should ask:

What is the balance for each director at the year-end?
Was the account overdrawn at any point during the tax year?
Did total loans exceed £10,000 at any time?
Which withdrawals were loans, dividends, salary, expenses or repayments of an existing credit?
Are there valid records for each dividend and payroll payment?
On what date was each loan or advance made?
Does the balance include advances made before and after 6 April 2026?
What is the nine-month-and-one-day repayment deadline?
Has any amount been genuinely repaid or merely recycled?
Do the 30-day or arrangements anti-avoidance rules apply?
Is shareholder approval required under the Companies Act?
What must be disclosed in the annual accounts?
Is a P11D, P11D(b) or payrolled-benefit calculation required?
Can the director afford a permanent repayment?
Does the company have distributable profits for a dividend?
What personal tax and National Insurance would each option create?
Is the company solvent after considering all liabilities?
Has relief been claimed for any section 455 tax paid in earlier years?

The answers should be supported by the ledger, bank statements, payroll records, management accounts and legal documentation.

Common mistakes to avoid

Treating every withdrawal as a dividend

A dividend requires distributable profits and a valid company decision. A bank transfer labelled “dividend” does not create the necessary reserves or paperwork.

Looking only at the year-end balance

A loan over £10,000 during the tax year may create a taxable benefit even if it is repaid before year-end. Accounts disclosure can also consider advances that existed during the year.

Applying one section 455 rate to every advance

The rate depends on when the loan was made. Mixed historic balances need transaction-level analysis, especially following the increase to 35.75% from 6 April 2026.

Assuming a repayment produces an immediate refund

If the repayment occurs after the original nine-month deadline, the company usually waits until nine months and one day after the end of the later accounting period before the relief becomes payable.

Forgetting to claim the relief

HMRC does not necessarily repay section 455 tax automatically. The company must use the correct claim route within the time limit.

Repaying and immediately borrowing again

The 30-day rule and arrangements rule can defeat temporary or pre-arranged repayments.

Crediting a gross bonus to the loan account

Only the net pay after payroll deductions will normally clear the debt. PAYE and National Insurance must still be funded.

Using a pension contribution as a repayment

A company pension contribution goes to the pension scheme, not back to the company. It does not clear the director’s debt.

Ignoring company-law approval

Tax reporting does not replace the need for member approval where the Companies Act requires it.

Assuming the debt disappears in liquidation

The opposite is often true. A liquidator may actively pursue the loan as a company asset.

Planning options before the deadline

There is no single best solution. The company and director should compare several possibilities.

Permanent cash repayment

This is often the cleanest option. It uses the director’s personal cash but may avoid section 455 and reduce future benefit charges.

Lawful dividend

This may clear the account without a personal bank transfer, but it requires distributable profits and creates dividend tax for the shareholder.

Salary or bonus

This can work even where distributable profits are insufficient, but PAYE and National Insurance may make it expensive. Only net pay reduces the loan.

Genuine expense credits

Outstanding business expenses paid personally by the director can be credited if supported by receipts and the company’s expense policy.

Interest-bearing loan

Charging and collecting sufficient interest may reduce a benefit-in-kind charge, but it does not remove the principal debt or section 455 exposure.

Formal write-off or release

This may produce section 455 relief but can create personal Income Tax, Class 1 National Insurance and company-law concerns. It should not be used without tailored advice.

Leaving the loan outstanding and paying section 455

Sometimes repayment is not commercially or personally possible. The company may pay the section 455 charge and claim relief later. This preserves the debt but creates a substantial company cashflow cost and may leave beneficial-loan reporting in place.

The modelling should include company cash, personal tax, National Insurance, distributable reserves, solvency, timing and the director’s longer-term extraction plan.

Frequently asked questions

Is an overdrawn director’s loan account illegal?

Not automatically. However, shareholder approval may be required under the Companies Act, the loan may breach the company’s articles or another agreement, and the directors must continue to comply with their duties. A loan made without required approval can have serious legal consequences.

Is section 455 paid by the director?

No. The company pays the section 455 charge. The director may separately pay Income Tax on a beneficial loan, a dividend, salary or a written-off balance.

Does a trading loss cancel section 455?

No. Section 455 is separate from ordinary Corporation Tax on trading profits. A loss-making company can still owe it.

What is the current section 455 rate?

It is 35.75% for loans made or benefits conferred on or after 6 April 2026. Loans made from 6 April 2022 to 5 April 2026 generally use 33.75%, and older loans may use earlier rates. The date and history of each advance matter.

What is the repayment deadline?

Nine months and one day after the end of the relevant Corporation Tax accounting period. For a 31 March 2027 year-end, that would normally be 1 January 2028.

Does repaying before the company year-end prevent all tax charges?

Not necessarily. It may remove the year-end section 455 exposure, but a beneficial-loan charge can still arise if the balance exceeded £10,000 during the tax year. Accounts disclosure may also still be required.

Can I repay the loan and take it back a week later?

You can make transactions, but anti-avoidance rules may prevent the repayment from reducing the older section 455 balance. A planned or temporary repayment should be reviewed carefully.

Can the company declare a dividend after the year-end and backdate it?

No. A dividend should be recorded on the date it was validly declared or became due. It cannot be backdated simply to change the previous year’s loan balance.

What happens if the loan exceeds £10,000 for one day?

The small-loan benefit exemption can be lost if total outstanding loans exceed £10,000 at any point in the tax year. The calculation should reflect the amount and period for which the loan was available.

If the director pays interest, is section 455 avoided?

No. Interest can reduce or remove the beneficial-loan amount, but section 455 concerns the outstanding principal. The principal must be repaid, released or written off to obtain the relevant relief.

Can two directors share one loan account?

Separate accounts are preferable and normally necessary for accurate legal, tax and disclosure treatment. One director’s credit should not be used casually to hide another director’s debt.

Can an overdrawn loan stop a company sale?

It may not stop a sale, but buyers usually examine director and shareholder balances carefully. They may require repayment before completion, adjust the price, seek warranties or treat the balance as debt-like. Early planning makes the position easier to resolve.

What happens if I cannot repay?

The company may have to pay section 455 and continue reporting any beneficial loan. A dividend or bonus may be possible only if the legal, tax and cash conditions are met. If the company is insolvent or under creditor pressure, obtain specialist advice immediately.

The key message for directors

An overdrawn director’s loan account is not just a bookkeeping balance. It is money owed to a separate legal entity, and it sits at the intersection of Corporation Tax, personal tax, National Insurance, company law, financial reporting and insolvency law.

The most effective approach is to:

keep personal and company expenditure separate;
review the account monthly;
document salary, dividends and expenses correctly;
identify the date of each advance;
monitor both the £10,000 benefit threshold and the section 455 deadline;
avoid temporary repayments and reborrowing;
plan a permanent solution while there is still time; and
claim relief for earlier section 455 payments when it becomes due.

The 35.75% section 455 rate for post-5 April 2026 loans makes proactive management even more important. On a £50,000 balance, the temporary company tax charge can be £17,875, before late-payment interest or benefit-in-kind costs.

How PR Accountants can help

PR Accountants can help directors understand the true balance, correct the records and choose a practical route before tax and filing deadlines are missed.

Our support can include:

reconstructing and reconciling director’s loan accounts;
distinguishing loans from salary, dividends and reimbursed expenses;
calculating section 455 at the correct historic and current rates;
reviewing mixed balances around the 6 April 2026 rate change;
preparing CT600A disclosures and section 455 relief claims;
calculating beneficial-loan amounts and Class 1A National Insurance;
reviewing dividend capacity and remuneration options;
creating a repayment and cashflow plan;
improving monthly bookkeeping and management reporting; and
identifying when legal or insolvency advice is also needed.

If your director’s loan account is overdrawn, the earlier it is reviewed, the more options you are likely to have.

Email: info@praccounting.co.uk
Website: www.praccounting.co.uk
Telephone: 0330 043 0792