Director's Loan Account: Tax Implications

Director's Loan Account: Tax Implications Explained

If you're a director of a UK limited company, you almost certainly have a director's loan account (DLA). It's one of the most common — and most misunderstood — areas of company tax. Get it wrong, and you could face unexpected tax bills, benefit-in-kind charges, and even HMRC enquiries.

This guide covers everything you need to know: what a DLA is, the tax implications of borrowing from your company, Section 455 tax, the bed and breakfasting anti-avoidance rules, and how to manage your DLA properly.

What Is a Director's Loan Account?

A director's loan account is simply a record of all financial transactions between you (as a director) and your limited company. Think of it as a running tab.

Every time you:

• Take money out of the company (that isn't salary, dividends, or expense reimbursements), the DLA goes overdrawn (you owe the company)
• Put money in to the company (personal funds, loans to the company), the DLA goes into credit (the company owes you)

The DLA balance at year-end determines the tax treatment.

Common Transactions That Affect Your DLA

Overdrawn DLA: When You Owe the Company

An overdrawn director's loan account means you've taken more money from the company than you've put in (excluding salary and dividends). This is effectively a loan from your company to you — and it has significant tax consequences.

1. Section 455 Tax (S455)

This is the big one. If your DLA is overdrawn at the end of your company's accounting period, your company must pay Section 455 tax at a rate of 33.75% on the outstanding balance.

Example: Your company's accounting period ends on 31 March 2026. Your DLA shows you owe the company £20,000. Your company must pay:

£20,000 × 33.75% = £6,750 in S455 tax

This is paid alongside the company's normal corporation tax — 9 months and 1 day after the accounting period end. So for a 31 March 2026 year end, the S455 tax is due by 1 January 2027.

Is S455 Tax Lost Forever?

No — and this is the crucial part. S455 tax is temporary. When you repay the loan, your company can claim the S455 tax back from HMRC. However:

• You can't claim it back until 9 months after the end of the accounting period in which you repaid the loan
• The refund must be claimed — it's not automatic

So if you repay the £20,000 during the year ending 31 March 2027, you can claim the £6,750 back from HMRC after 1 January 2028. That's potentially a long time for the company to be out of pocket.

2. Benefit in Kind (BIK) — If the Loan Exceeds £10,000

If your overdrawn DLA balance exceeds £10,000 at any point during the tax year (6 April to 5 April), HMRC treats the loan as a benefit in kind. This means:

• You pay income tax on the benefit (taxed at the official rate of interest, currently 2.25%)
• Your company pays Class 1A National Insurance at 13.8% on the same amount
• The benefit must be reported on form P11D

Example: Your DLA is overdrawn by £30,000 for the full tax year. The taxable benefit is:

£30,000 × 2.25% = £675

If you're a higher-rate taxpayer, you'd pay income tax of £675 × 40% = £270. Your company would pay Class 1A NIC of £675 × 13.8% = £93.15.

You can avoid the BIK charge by paying interest on the loan at or above HMRC's official rate (currently 2.25%). The interest your company receives is taxable as income, but it eliminates the benefit in kind.

Keep your CT600 accurate. If your DLA is overdrawn, you'll need to complete the relevant boxes on your corporation tax return. Taxpipe walks you through every field — file your CT600 from £59 →

The Bed and Breakfasting Rules

This is where many directors get caught out. Bed and breakfasting refers to the practice of repaying an overdrawn DLA just before the year end, only to borrow the money back shortly afterwards — purely to avoid S455 tax.

How the Anti-Avoidance Rules Work

HMRC introduced anti-avoidance rules (in Section 455(3A)–(3D) CTA 2010) that apply when:

1. You repay £5,000 or more of your DLA, and
2. Within 30 days before or after the repayment, you take out a new loan of £5,000 or more from the company

In this scenario, the repayment is matched against the new loan and effectively ignored for S455 purposes. The company can't claim back the S455 tax on the "repaid" amount.

Example of Bed and Breakfasting

Your company's year end is 31 March 2026:

• 25 March 2026: You repay £15,000 to clear your overdrawn DLA
• 10 April 2026: You borrow £15,000 back from the company

Under the bed and breakfasting rules, the repayment and new loan are matched. The DLA is treated as if it was never repaid, and S455 tax is still due on the £15,000.

How to Legitimately Manage Your DLA

If you genuinely need to repay and then re-borrow, you need to ensure there's a gap of more than 30 days between the repayment and the new loan. And even then, HMRC can challenge the arrangement if they believe it lacks commercial substance.

Better strategies include:

• Vote dividends to clear the DLA (if distributable reserves allow)
• Take a salary bonus and use it to repay the loan
• Genuinely repay and don't re-borrow
• Offset expenses — ensure all legitimate business expenses paid personally are credited to your DLA

DLA in Credit: When the Company Owes You

When your DLA is in credit, it means the company owes you money. This is common when:

• You lent the company money to get it started
• You've paid company expenses from personal funds
• You've paid more into the company than you've taken out

Tax Implications of a Credit DLA

A credit DLA is much simpler from a tax perspective:

• No S455 tax — that only applies to overdrawn balances
• No BIK — there's no benefit because the company owes you, not the other way around
• Repayment is tax-free — when the company repays you, it's simply returning your own money. No income tax, no National Insurance, no capital gains tax.

This is why many tax advisers recommend lending money to your company via the DLA rather than investing as share capital — it's easier to get back tax-free.

Should You Charge Interest on a Credit DLA?

You can charge interest, and there may be a tax advantage:

• The interest is a deductible expense for the company (reducing its corporation tax bill)
• You'll pay income tax on the interest received (at your marginal rate)
• If you're a basic-rate taxpayer, this can be slightly more tax-efficient than taking dividends

However, the interest must be at a commercial rate — HMRC will challenge excessive interest rates. Stick to rates comparable to what a bank would charge on a similar unsecured loan.

Writing Off a Director's Loan

If the company decides to write off (forgive) an overdrawn director's loan, the tax consequences are significant:

• The written-off amount is treated as a distribution (like a dividend) for income tax purposes
• You'll pay income tax at dividend rates: 8.75% (basic rate), 33.75% (higher rate), or 39.35% (additional rate)
• The company still pays Class 1A NIC at 13.8% on the written-off amount
• The S455 tax can be reclaimed (since the loan is no longer outstanding)
• The write-off is not a deductible expense for the company

Writing off a loan is rarely the most tax-efficient option. In most cases, it's better to repay through dividends or salary over time.

Reporting DLAs on Your CT600

Your director's loan account must be accurately reported on your CT600 corporation tax return. Key areas include:

• CT600A (Loans and arrangements to participators) — if any loans to directors are outstanding at the year end, you must complete this supplementary page
• Box 425 — total amount of S455 tax due
• Corporation tax computation — S455 tax is included in the total tax payable

Getting these figures wrong can trigger HMRC enquiries. Our guide on directors' loan accounts and your CT600 explains the reporting requirements in detail.

For a broader understanding of how directors extract money from their companies, see our guide on dividends vs salary tax efficiency.

Practical Tips for Managing Your DLA

1. Track Every Transaction

Keep a running spreadsheet or use accounting software to record every personal transaction. Don't wait until year-end to figure out your DLA balance — by then it's too late to take corrective action.

2. Claim All Legitimate Expenses

Many directors have a bigger overdrawn DLA than they need to because they haven't claimed back legitimate business expenses. Every personal payment for business purposes should be credited to your DLA. See our guide to limited company expenses you can claim.

3. Vote Interim Dividends

If your DLA is becoming overdrawn, consider voting interim dividends throughout the year. These can be credited to your DLA to reduce or eliminate the overdrawn balance.

Important: You can only pay dividends from distributable reserves (accumulated profits). Paying dividends when there are no reserves is illegal and the dividends may need to be repaid.

4. Get the Timing Right

If you're going to repay your DLA, do it well before the year end — not in the last few days. This avoids any suggestion of bed and breakfasting and gives you a clear record.

5. Document Everything

HMRC expects to see proper documentation for DLA transactions:

• Board minutes approving loans and repayments
• Written loan agreements (especially for large amounts)
• Records of how amounts were calculated
• Evidence of repayments

Filing your CT600 with an overdrawn DLA? Taxpipe automatically calculates your S455 liability and generates the CT600A supplementary page. File your CT600 online from £59. Start now →

DLA and Company Insolvency

If your company becomes insolvent (can't pay its debts), an overdrawn DLA becomes a serious problem. The liquidator or administrator is legally required to recover all debts owed to the company — and that includes your overdrawn director's loan.

This means:

• You'll need to personally repay the overdrawn balance
• The liquidator may take legal action to recover the money
• Attempting to write off the loan before insolvency could be challenged as a transaction at undervalue

If your company is in financial difficulty and you have an overdrawn DLA, get professional advice immediately.

Frequently Asked Questions

How much can a director borrow from their company tax-free?

There's no strict limit on how much you can borrow, but borrowing over £10,000 triggers a benefit-in-kind charge unless you pay interest at HMRC's official rate (currently 2.25%). Any amount outstanding at the year end will attract S455 tax at 33.75% (which is refundable when you repay). The real question is whether you can afford the tax consequences.

What is the S455 tax rate for 2025/26?

The S455 tax rate is 33.75%, which matches the higher-rate dividend tax rate. This rate applies to the full overdrawn balance at the end of your accounting period. The tax is payable 9 months and 1 day after the period end, alongside your normal corporation tax.

Can I repay my director's loan with dividends?

Yes — this is one of the most common and tax-efficient ways to clear an overdrawn DLA. You vote a dividend, but instead of the company paying you cash, the dividend is credited to your DLA to reduce the amount you owe. You'll still pay personal income tax on the dividend, but you avoid S455 tax and benefit-in-kind charges. Make sure you have sufficient distributable reserves before declaring dividends.

What happens if I never repay my director's loan?

The company will keep paying S455 tax every year, and you'll keep incurring BIK charges on any balance over £10,000. If the company writes off the loan, it's taxed as a distribution. If the company is wound up, the liquidator will pursue you personally for the balance. Essentially, you can't avoid tax on money taken from your company — the only question is which tax you end up paying.

Do I need to report my DLA on my personal tax return?

You don't report the DLA balance itself, but you do need to report any benefit in kind (from the P11D) on your Self Assessment return. If you receive interest on a credit DLA, that's also reportable as income. And of course, any dividends voted to offset the DLA must be reported as dividend income.

Summary

Director's loan accounts are a normal part of running a limited company, but they require careful management to avoid unnecessary tax charges. The key rules to remember:

• Overdrawn DLA at year end = S455 tax at 33.75% (refundable on repayment)
• Over £10,000 overdrawn = benefit in kind (unless you pay official rate interest)
• Bed and breakfasting (repay + re-borrow within 30 days) is caught by anti-avoidance rules
• Credit DLAs are tax-efficient — repayments to you are tax-free
• Write-offs are taxed as distributions — usually not the best option

Get your CT600 right. Taxpipe handles director's loan calculations, S455 tax, and CT600A supplementary pages automatically. File your corporation tax return from just £59. File with Taxpipe →

Related Reading

• Close Company Rules & Corporation Tax Explained
• Director's Loan Account and Corporation Tax: What You Need to Know
• Dividends vs Salary: The Tax-Efficient Way to Pay Yourself