Overdrawn Director's Loan Account & S455 Tax Explained
You've been taking money out of your company — maybe to cover personal expenses, maybe as a cash advance before declaring dividends. It made sense at the time. But now you're preparing your CT600 and your accountant (or your accounting software) is flagging a problem: your director's loan account is overdrawn.
This means you owe your company money. And if that balance isn't cleared within nine months and one day of the company's year-end, HMRC charges a special tax called S455 tax — on top of any corporation tax already due.
Here's everything you need to know, including how to avoid the charge, how to report it, and how to reclaim it once you've repaid the loan.
What Is a Director's Loan Account (DLA)?
Every limited company should maintain a director's loan account — a running record of money flowing between the director and the company. It tracks:
- Money you put IN to the company (credits)
- Money you take OUT of the company (debits)
- Salary, dividends, and expense reimbursements — which reduce what you owe
When the balance is positive (the company owes you), there's no issue. When the balance is negative (you owe the company), that's an overdrawn DLA.
Common ways a DLA becomes overdrawn
| Transaction | Effect on DLA |
|---|---|
| Personal expense paid by company card | Increases what you owe |
| Cash withdrawal for personal use | Increases what you owe |
| Dividend declared but company had insufficient profits | Creates an illegal dividend — still a loan |
| Director's salary paid but not processed through payroll | May be treated as a loan |
| Company pays your personal tax bill | Increases what you owe |
Key point: Taking money from the company isn't automatically a salary or dividend. If it's not properly documented as either, HMRC treats it as a loan from the company to you.
What Is S455 Tax?
Section 455 of the Corporation Tax Act 2010 (CTA 2010) — commonly written as S455 — imposes a tax charge on the company when a participator (which includes directors and shareholders) has an outstanding loan from a close company.
The basics
- Rate: 33.75% of the outstanding loan balance (for 2025/26 and 2024/25)
- Who pays it: The company — not the director personally
- When it's due: Nine months and one day after the end of the accounting period in which the loan was outstanding
- How it's reported: On the CT600, specifically in the CT600A supplementary page (loans to participators)
Example
Your company's year-end is 31 March 2026. At that date, you owe the company £20,000.
- S455 tax due: £20,000 × 33.75% = £6,750
- Payment deadline: 1 January 2027 (nine months and one day after 31 March 2026)
- Where to report: CT600A, included with the main CT600 return
The £6,750 is payable alongside any corporation tax the company owes. It's a real cash payment to HMRC — not just a paper entry.
The 33.75% Rate — Why That Number?
The S455 rate is designed to match the higher rate of dividend tax (33.75% in 2025/26). HMRC's logic: if you take money from a close company without declaring it as a dividend, they'll charge the equivalent tax anyway. It's an anti-avoidance measure to stop directors extracting profits tax-free by disguising them as loans.
Prior to April 2022, the S455 rate was 32.5%. It increased to 33.75% when dividend tax rates went up.
When Does S455 Apply?
S455 tax applies when all of these conditions are met:
- The company is a "close company" — most UK private limited companies with five or fewer shareholders are close companies
- A participator owes money to the company — the DLA is overdrawn at year-end
- The loan is still outstanding nine months and one day after the period end — this is the critical deadline
What counts as a "participator"?
A participator includes:
- Directors
- Shareholders
- Associates of the above (spouses, relatives, business partners)
- Any person entitled to acquire shares
So if your spouse takes a loan from your company and they're not a shareholder, S455 can still apply because they're an associate of a participator.
How to Avoid S455 Tax
You have several options to clear the DLA before the deadline:
1. Repay the loan
Simply transfer money from your personal account back to the company. The loan needs to be fully repaid by nine months and one day after the year-end.
2. Declare a dividend
If the company has sufficient distributable profits, you can declare a dividend and offset it against your DLA balance. This clears the loan — but you'll pay dividend tax personally.
For 2025/26:
- Basic rate: 8.75%
- Higher rate: 33.75%
- Additional rate: 39.35%
At the higher rate, the tax cost is the same as S455 — but dividend tax is paid by you personally, and it's a permanent charge (not reclaimable).
3. Declare a bonus
The company can pay you a bonus and offset it against the DLA. You'll pay income tax and National Insurance, which is usually more expensive than dividends. However, the bonus is a corporation tax-deductible expense, reducing the company's CT bill.
4. Write off the loan
The company can formally write off the loan. However, the written-off amount is treated as a distribution (like a dividend) and you'll pay income tax on it. The company can't claim a corporation tax deduction for the write-off. This is rarely the best option.
5. Use a "bed and breakfasting" arrangement (careful!)
Some directors repay the loan just before the deadline and then borrow again immediately after. HMRC introduced anti-avoidance rules (S455(3A) and S464A) in 2013 specifically to counter this:
- 30-day rule: If you repay £5,000+ and then re-borrow within 30 days, the repayment may not count
- Intention rule: If arrangements were in place to re-borrow at the time of repayment, HMRC can challenge it
- £15,000+ rule: Additional reporting requirements apply for loans above £15,000
Warning: "Bed and breakfasting" is a red flag for HMRC. If you repay and re-borrow in a pattern, expect scrutiny.
How to Report on the CT600
If S455 tax is due, you must complete the CT600A supplementary page — "Loans to Participators by a Close Company."
What you need to include:
- The name of each participator with an outstanding loan
- The amount outstanding at the end of the accounting period
- The S455 tax due (33.75% of the outstanding amount)
- Any repayments made since the period end (if filing after partial repayment)
The S455 tax is entered in Box 485 of the CT600 (Tax payable under Section 455).
Filing with Taxpipe
Taxpipe automatically detects when you report an overdrawn DLA and calculates the S455 liability. It generates the CT600A supplementary page and includes it with your filing. You don't need to manually calculate the 33.75% or know which boxes to fill in — just enter the outstanding loan balance and Taxpipe handles the rest.
File your CT600 with Taxpipe →
Getting S455 Tax Back
Here's the silver lining: S455 tax is refundable. Once you repay the director's loan (or part of it), you can claim the corresponding S455 tax back from HMRC.
How the refund works
- Repay the loan (or part of it) to the company
- Wait for the "relief due" date — this is nine months and one day after the end of the accounting period in which the repayment was made
- Claim the refund by filing Form CT600A (or amending a previous CT600 return)
Example timeline
| Event | Date |
|---|---|
| Company year-end | 31 March 2026 |
| DLA overdrawn by £20,000 | 31 March 2026 |
| S455 tax paid (£6,750) | 1 January 2027 |
| Director repays £20,000 | 15 June 2026 |
| S455 refund claimable | 1 January 2027 |
In this case, because the repayment was made during the 2026/27 accounting period, the refund becomes due nine months and one day after that period ends (31 March 2027 → 1 January 2028). But wait — some repayments made before the original S455 payment date can reduce the amount due in the first place. The rules are:
- If you repay before the CT600 filing deadline, you can reduce the S455 charge on the return itself
- If you repay after filing, you'll need to submit a claim for relief (HMRC form L2P)
How long does the refund take?
HMRC aims to process S455 refund claims within 12 weeks, but delays of 6+ months are common. You can chase after 28 days by calling the Corporation Tax helpline.
What About the Personal Tax Consequences?
An overdrawn DLA doesn't just create an S455 problem. It can trigger benefit-in-kind (BIK) charges too:
If the loan exceeds £10,000 at any point in the tax year:
- The company must report the loan on form P11D as a benefit in kind
- The director pays income tax on the official rate of interest (currently 2.25%) applied to the loan balance
- The company pays Class 1A National Insurance (13.8%) on the same amount
Example
Loan balance: £30,000 for the full tax year
- BIK: £30,000 × 2.25% = £675
- Income tax (at 40%): £270
- Employer's NIC: £675 × 13.8% = £93.15
This is relatively modest, but it's an additional compliance burden and cost.
How to avoid the BIK
- Keep the DLA below £10,000 at all times
- Charge interest at the official rate (the director pays interest to the company)
- Repay the loan quickly
Common Mistakes Directors Make
1. Not tracking the DLA properly
Many directors don't maintain a formal DLA ledger. They take money out sporadically and only discover the balance is overdrawn at year-end. Fix: Use accounting software (Xero, FreeAgent, QuickBooks) that tracks the DLA automatically.
2. Assuming dividends are always the answer
Dividends can only be declared from distributable profits (accumulated realised profits minus losses). If your company doesn't have sufficient reserves, a dividend is illegal and will be reclassified as a loan. Fix: Check reserves before declaring dividends.
3. Missing the nine-month-and-one-day deadline
This is the most expensive mistake. S455 tax at 33.75% is a significant cash flow hit. Fix: Set a calendar reminder for the deadline and plan repayment well in advance.
4. Forgetting to claim the S455 refund
Directors pay the S455 tax and then forget to claim it back after repaying the loan. HMRC won't refund automatically — you must claim it. Fix: Track S455 payments and claim refunds promptly.
5. Bed and breakfasting without understanding the rules
Repaying and re-borrowing in a cycle can result in S455 applying despite the "repayment." The anti-avoidance rules are strict. Fix: If you genuinely repay, don't re-borrow for at least 30 days — and ideally much longer.
Frequently Asked Questions
Does S455 tax apply to all companies?
No. S455 only applies to close companies — broadly, companies controlled by five or fewer participators. Most UK private limited companies are close companies, but larger companies with many shareholders may not be.
Can I write off the director's loan instead of repaying it?
Yes, but it's treated as a deemed dividend for income tax purposes. You'll pay dividend tax on the amount written off. The company doesn't get a corporation tax deduction. And you'll still need to report it on the CT600.
What if two directors have loans — do they get combined?
No. Each participator's loan is assessed separately. Director A might owe £15,000 and Director B might owe £5,000 — S455 is calculated on each individually.
Is there a minimum loan amount before S455 applies?
No. S455 applies to any overdrawn balance, even £1. However, the BIK rules only kick in when the loan exceeds £10,000 at any point in the tax year.
Can I charge interest on the director's loan to reduce S455?
No. Charging interest (director pays interest to the company) avoids the BIK charge but doesn't affect S455. The only way to avoid S455 is to repay the loan (or offset it with dividends/salary) before the deadline.
What happens if I can't repay the loan?
The company pays S455 tax. You can still repay later and claim the tax back. But the company needs to have the cash to pay HMRC in the meantime. If the company can't pay, HMRC will charge interest on the late payment.
Got an overdrawn director's loan account? Taxpipe calculates S455 tax automatically, generates the CT600A supplementary page, and files everything with HMRC. Just £59 per filing — no accountant needed. Get started →