If you have been drawing money from your limited company in excess of your salary and declared dividends, you may have an overdrawn director’s loan account. If that loan is not cleared within the right timeframe, your company may face a Section 455 tax charge.
For loans made or benefits conferred on or after 6 April 2026, the Section 455 rate is 35.75%. For loans made between 6 April 2022 and 5 April 2026, the rate remains 33.75%. That timing matters, because the rate depends on when the loan or advance was made, not simply when you notice the overdrawn balance.
Director’s loan accounts are one of the most common areas of confusion and unintended cost for owner-managed businesses. Understanding exactly how they work, when the S455 charge applies, and what you can do to manage your position is essential for any director who moves money between themselves and their company in any form that is not formal salary, declared dividends or genuine expense reimbursement.
What is a director’s loan account?
A director’s loan account, usually called a DLA, is a record kept in the company’s accounts that tracks money flowing between you as a director and your company where that money is not salary, dividends or genuine reimbursed business expenses.
When you take money out of the company beyond what you have been paid in salary and dividends, the excess is normally recorded as a loan from the company to you. This makes your DLA overdrawn. Conversely, if you lend money to your company, or if you have paid for business expenses personally that have not yet been reimbursed, your DLA is in credit and the company owes you money.
An overdrawn DLA is not automatically a problem, but it becomes one if it is not cleared within the right timeframe, if it creates a personal tax benefit, or if it is poorly documented. Our full guide to directors loan accounts explains the mechanics in detail, and it is worth reading alongside this article for a complete picture.
What is Section 455 tax?
Section 455 of the Corporation Tax Act 2010 imposes a tax charge on close companies, which includes most owner-managed limited companies, where a loan to a participator remains outstanding more than 9 months after the end of the company’s accounting period. A participator is usually a shareholder, and in owner-managed businesses the director and shareholder are often the same person.
The charge is paid by the company, not by you personally, and it is reported through the company’s Corporation Tax return. It is separate from corporation tax on trading profits, although the payment deadline is normally the same.
For loans made on or after 6 April 2026, the rate is 35.75%. This means that if your DLA is overdrawn by £20,000 and that amount is within the new rate period and not repaid in time, the company could face an additional S455 tax charge of £7,150.
The charge is designed to discourage directors from using their companies as an informal bank account and extracting money without triggering the correct tax treatment.
How the rate has changed
The S455 rate has increased over time, broadly tracking the dividend upper rate.
| Period | Section 455 rate |
|---|---|
| Before 6 April 2016 | 25% |
| 6 April 2016 to 5 April 2022 | 32.5% |
| 6 April 2022 to 5 April 2026 | 33.75% |
| On or after 6 April 2026 | 35.75% |
Each increase has made the cost of leaving an overdrawn DLA unaddressed more expensive. On a £50,000 overdrawn loan made on or after 6 April 2026, the S455 charge at 35.75% is £17,875. At the old 25% rate it would have been £12,500.
Working with accountancy services Stockport businesses trust for proactive advice means these issues are identified and addressed before the 9-month deadline, rather than discovered when the corporation tax bill arrives.
When does the 9-month clock start?
The deadline runs from the end of your company’s accounting period. If your company’s year end is 31 March 2027, the deadline for repaying an overdrawn DLA to avoid the S455 charge is 1 January 2028. For a 31 December 2026 year end, the deadline is 1 October 2027.
Understanding corporation tax deadlines in the UK is therefore directly relevant to DLA management, because the S455 payment normally falls due at the same time as your corporation tax payment if the loan is still outstanding.
You can use our Corporation Tax Calculator to estimate your overall corporation tax liability, including any potential S455 charge. Our guide on how to calculate corporation tax explains how the charges sit within your company’s tax return.
Is the S455 tax refundable?
Yes. If the loan is subsequently repaid, released or written off, the S455 tax can usually be reclaimed by the company. However, the repayment is not immediate.
HMRC will not repay the S455 tax until 9 months and 1 day after the end of the Corporation Tax accounting period in which the loan was repaid, written off or released. This means there can be a significant delay between clearing the loan and receiving the S455 refund. In the meantime, your company has effectively had cash tied up with HMRC.
The timing is best illustrated with an example. If your company has a 31 March year end and you repay a loan in January 2027, the repayment falls in the accounting period ending 31 March 2027. The S455 refund would not normally be due until 1 January 2028.
This is exactly why management accounting service monitoring of your DLA throughout the year is valuable. Knowing where your loan account stands month by month means you can clear or manage it before the year end where possible, rather than triggering the charge and waiting for a delayed refund.
The bed and breakfasting anti-avoidance rule
HMRC is well aware that some directors repay a loan temporarily and then borrow the money again shortly afterwards. To counter this, anti-avoidance rules can apply.
The 30-day rule applies where repayments totalling £5,000 or more are made and new loans or advances totalling £5,000 or more are made within the relevant 30-day period. In broad terms, HMRC can match the repayment against the new borrowing, so the repayment does not reduce the S455 exposure in the way the director expected.
There is also a wider rule where the outstanding loan is £15,000 or more and arrangements exist for further borrowing. If a repayment is made as part of arrangements to redraw the money, HMRC can disregard the repayment for S455 purposes.
The practical message is simple. Genuine repayment of the loan is the reliable way to remove the charge. Circular cash movements designed only to avoid S455 can create more problems than they solve.
Beneficial loan interest and the personal tax charge
Section 455 tax is a charge on the company, but there can also be a separate personal tax issue when a director’s loan exceeds £10,000 at any point in the tax year.
At this level, HMRC can treat the loan as a beneficial loan if no interest is charged, or if interest is charged below HMRC’s official rate. The benefit is reportable on form P11D, or through payrolling where applicable, and Class 1A National Insurance is payable by the company.
The benefit in kind value is calculated by reference to HMRC’s official rate of interest. From 6 April 2026, that rate is 3.75%, unless HMRC changes it following a quarterly review. If no interest is being charged on the loan, or if the rate charged is below the official rate, the difference can become a taxable benefit.
You have 2 common ways to reduce or eliminate this benefit. The first is to charge interest at least equal to HMRC’s official rate. The second is to keep the loan balance below £10,000 throughout the tax year.
If your loan does exceed £10,000 and you have not been paying interest on it, this benefit may need to be declared on your personal tax return UK. If it has not been declared in previous years, making a voluntary disclosure to HMRC may be the right approach.
Understanding employer NI rates is relevant here because Class 1A NIC on the benefit is charged on the company, adding a further cost to an overdrawn DLA that exceeds £10,000.
Writing off a director’s loan
If the company writes off rather than receives repayment of an overdrawn DLA, the amount written off can create a personal tax charge for the director. For a director-shareholder, it is commonly treated as dividend income for income tax purposes, although the precise treatment can depend on the facts.
This means writing off the loan is not a cost-free way of clearing the DLA. You may face personal tax on the written-off amount, and the company generally cannot claim a corporation tax deduction for the write-off. The S455 tax paid when the loan was outstanding may be reclaimable by the company, but the director’s personal tax position still needs to be dealt with.
For example, if a higher-rate taxpayer has a £30,000 loan written off in 2026/27 and the amount is treated as dividend income, the dividend tax rate above the dividend allowance could be 35.75%. The final tax cost depends on the director’s wider income, available allowance and exact treatment, so this is not an area to handle without advice.
Our corporation tax filing service team handles the correct reporting of DLA-related charges in your company’s tax return to make sure both the initial S455 charge and any subsequent repayment or write-off are dealt with accurately.
Overdrawn DLAs and the risk of HMRC enquiry
An overdrawn DLA that is poorly documented, inconsistently managed or not disclosed correctly in your accounts is a risk factor for HMRC enquiry. HMRC can compare company accounts, directors’ personal tax returns and wider available data when reviewing whether income, drawings and benefits have been reported correctly.
Keeping your DLA properly recorded and clearly separated in your company’s books is the most important protective step. If you have a cloud accounting system in place, your DLA should be maintained as a specific account within your chart of accounts, updated every time a transaction occurs.
Bookkeeping Stockport professionals keeping your records in proper order means your DLA balance is always current and verifiable, and any movement in the account is clearly explained and coded correctly. Our guide on small business bookkeeping records explains what documentation needs to be retained alongside your accounting entries.
Why messy bookkeeping creates problems at year end is especially true for DLAs. A DLA that has not been properly maintained often contains a mix of salary, loan movements, expense reimbursements and personal spending that is difficult to unpick retrospectively.
Using management accounts to monitor your DLA
The best way to avoid S455 tax is to never let your DLA become significantly overdrawn in the first place, and the best way to do that is to track it monthly rather than discovering the position at year end.
How management accounts help directors control business spending includes DLA monitoring as a core element of the financial oversight a director needs. If you know your DLA balance at the end of every month, you can take action before the year-end position becomes a problem.
The 3 accounting reports every limited company owner should review regularly includes the balance sheet, where your DLA appears as either an asset if you owe the company money, or a liability if the company owes you money. Reviewing your balance sheet monthly means the DLA position is never a surprise.
Management accounts vs year-end accounts makes clear that waiting for annual statutory accounts to understand your DLA position is far too late for effective planning. By the time your accountant prepares year-end accounts, the 9-month deadline may already be approaching.
The interaction with salary and dividends
Most overdrawn DLAs arise not from intentional borrowing but from informal cash extraction that has not been properly categorised. A director who regularly transfers money from the company account to their personal account without documenting whether it is salary, dividend or loan creates a DLA by default.
Getting the structure of how you extract money from your company right from the start avoids this problem. A clear and documented approach to salary and dividends, with any genuine borrowing separately recorded and tracked, means your DLA position is always transparent.
Our tax tables for 2025/26 give useful thresholds for salary and dividend planning, but directors should also factor in the 2026/27 dividend rate increases when planning future remuneration.
If your DLA has grown because you have been paying yourself less formally than you should have been, retrospectively declaring dividends to clear it may be possible only where the company had sufficient distributable reserves at the time those dividends were declared. This is not a decision to take without professional advice.
DLAs and cash flow
An overdrawn DLA represents money that has left the company and sits on the balance sheet as a debt owed by the director. From a cash flow perspective, the company has already paid the money out. The S455 tax is a further cash outflow that compounds the impact.
How poor invoice tracking can damage your cash flow is relevant here because a company with weak debtor management often has a director drawing more cash than it can sustainably support. Tightening up cash collection reduces the pressure on directors to supplement slow incoming cash with additional personal drawings that inflate the DLA.
How Xero can make it easier to stay on top of cash flow explains how real-time visibility of your cash position reduces the likelihood of drawing money in a way that creates an unintended DLA problem.
Using Xero reporting for owners to pull a regular DLA balance report takes minutes and ensures you are never surprised by the position when your accountant reviews the year-end accounts.
Payroll and the DLA connection
Directors sometimes draw money informally rather than through payroll because it feels simpler in the short term. The result is often an inflated DLA alongside payroll records that do not accurately reflect what the director has actually received from the company.
Maintaining proper payroll for director salary and treating all other drawings correctly in the books is the foundation of a clean DLA position. Payroll services stockport businesses use should ensure director salary is processed through RTI submissions to HMRC each pay period, and informal drawings are clearly separated and coded at source rather than left to be sorted out at year end.
The 5 payroll problems small employers can avoid covers common payroll errors, some of which directly affect the accuracy of DLA records, and our guide on p60 forms explains how year-end payroll records connect to both the company’s accounts and the director’s personal tax return.
The bookkeeping foundation
Preventing S455 tax problems ultimately comes down to having bookkeeping in place that is current, accurate and clearly categorised. Every transaction between you and your company needs to be recorded and coded correctly so that your DLA balance is always up to date.
Our bookkeeping checklists for UK small businesses include DLA reconciliation as a monthly task, and how often a small business should update its bookkeeping explains why frequency matters particularly for accounts like the DLA, where the balance changes with every transaction.
If your records are currently in poor shape and you are not sure what your DLA balance actually is, getting a clear picture as quickly as possible is the priority. The longer an unrecorded or misrecorded DLA position goes unaddressed, the more difficult and expensive it becomes to resolve.
For businesses reconsidering their overall financial structure, including whether a limited company remains the right vehicle given the complexities around DLAs, S455 tax and the broader remuneration picture, our overview of sole trader advantages provides useful context.
International considerations
For directors who have been considering relocating their business outside the UK, the complexities of the UK corporate tax system, including S455 charges, beneficial loan reporting and the overall compliance burden of running a limited company, are part of the picture. Our relocation service dubai uk businesses team can walk you through what a different operating structure might look like if the cumulative compliance and tax costs of the UK limited company model are becoming difficult to justify.
FAQs: Section 455 tax and director loans
What is the current Section 455 tax rate?
The Section 455 rate is 35.75% for loans made or benefits conferred on or after 6 April 2026. Loans made between 6 April 2022 and 5 April 2026 are charged at 33.75%. The correct rate depends on when the loan or advance was made.
Is Section 455 tax in addition to corporation tax on profits?
Yes. S455 tax is charged separately from corporation tax on trading profits. If your company has both a trading profit and an outstanding director-shareholder loan, both charges may apply and are normally payable at the same Corporation Tax deadline.
What happens when I repay the loan?
When the loan is repaid, the S455 tax becomes reclaimable by the company. However, HMRC will not normally repay it until 9 months and 1 day after the end of the accounting period in which the repayment, release or write-off took place.
What is the 30-day rule?
The 30-day rule is an anti-avoidance rule aimed at temporary repayments. Where repayments totalling £5,000 or more are made and new loans or advances totalling £5,000 or more are made within the relevant 30-day period, HMRC may match the repayment against the new borrowing, so the S455 position is not improved as intended.
Is there a benefit in kind if my loan is below £10,000?
Usually no. The beneficial loan benefit in kind rules generally apply where the loan balance exceeds £10,000 at any point in the tax year. To avoid the beneficial loan charge, the balance needs to stay below the threshold throughout the tax year, unless interest is charged at an appropriate rate or another exemption applies.
Can I write off the loan instead of repaying it?
Yes, but writing off the loan can create a personal tax charge for the director, and the company generally cannot claim a corporation tax deduction for the write-off. The S455 tax originally paid may become reclaimable by the company, but the personal tax consequences still need to be dealt with carefully.
What if the company is owed money by the director at the time of insolvency?
If the company enters administration or liquidation with an outstanding DLA owed by a director, the liquidator will usually seek to recover that money as an asset of the company for the benefit of creditors. An overdrawn DLA in an insolvent company is a personal liability that cannot simply be ignored.
Does the S455 charge apply if I am only a director and not a shareholder?
Section 455 applies to loans made to participators, which usually means shareholders, and to certain associates. A director who holds no shares may fall outside S455, but other tax and employment-related loan rules can still apply. In owner-managed businesses, the director is often also a shareholder, which is why S455 commonly applies.
Get your director’s loan account under control
An overdrawn director’s loan account combined with a 35.75% S455 charge is one of the most avoidable yet commonly encountered tax problems for owner-managed businesses. The solution is straightforward in principle: keep your DLA properly recorded, monitor it monthly, and address any overdrawn balance before the 9-month deadline.
At U&W Chartered Accountants, we help directors across Stockport and beyond understand their DLA position and manage it correctly throughout the year. Whether you need a review of your current position, support with your company’s tax return, or broader advice on how to structure your remuneration, we are here.
Find out more on our about page or contact us directly via our contact page. You can request an instant quote for your limited company today to see how our services work.
