Directors' Loans and Overdrawn Loan Accounts Explained

Here is a situation we see all the time. A director needs some money, so they take it out of the company — a few hundred here, a couple of thousand there — meaning to sort out how to classify it later. Later never quite comes. Then the year-end arrives and we have to explain that they have built up an overdrawn director’s loan account, and there may be a tax charge attached. Almost nobody does this deliberately; most do not realise they have done anything at all. This post explains what a director’s loan is, and how to stay the right side of the rules.

What a director's loan account is

Your company is a separate legal entity, and its money is not yours to take freely. Money moving between you and the company that is not salary, a dividend or a legitimate expense reimbursement is a loan, tracked in your director’s loan account (DLA). The DLA can sit two ways:

• In credit — the company owes you (for example, you lent it money to get started or paid company costs personally).
• Overdrawn — you owe the company, because you have taken out more than you have put in or been paid.

An overdrawn DLA is where the tax consequences live.

Money in: lending to your own company

Lending money to your company is straightforward and can be useful. You can draw that money back out later tax-free, because you are simply being repaid — it was your money to begin with. The company can even pay you a commercial rate of interest on the loan (taxable in your hands, deductible for the company), though that has its own reporting. A DLA in credit is nothing to worry about.

Money out: the two rules that bite

An overdrawn DLA is fine in principle — companies can lend to their directors — but two rules turn it into a cost if you are not careful.

1. The nine months and one day rule

If your DLA is overdrawn at your company’s accounting year-end and is not repaid within nine months and one day of that date, the company must pay a tax charge on the amount still outstanding. This is the section 455 charge. Repay the loan inside that window and no section 455 charge arises.

2. The section 455 charge

Section 455 is a tax the company pays (via the CT600A pages of its corporation tax return) on a loan to a director/shareholder that is still outstanding after the nine-months-and-one-day deadline. The rate tracks the higher dividend rate, and because that rose in April 2026, so did section 455:

• Loans made on or after 6 April 2026: charged at 35.75%.
• Loans made between 6 April 2022 and 5 April 2026: charged at the earlier 33.75% rate.

So on a £20,000 loan left outstanding beyond the deadline, made after 6 April 2026, the company faces a section 455 charge of £7,150. That is a serious amount of cash to tie up because some drawings were never tidied away.

The good news — and the catch

Section 455 is reclaimable. Once the loan is repaid, released or written off, the company can recover the section 455 tax it paid — but not immediately. The repayment of section 455 tax is itself subject to a timing delay (broadly, you get it back nine months and one day after the end of the accounting period in which the loan is cleared). In the meantime the money sits with HMRC. So even though you get it back eventually, the cash-flow cost is real and can run for well over a year. Treat section 455 as an expensive interest-free loan to HMRC, not a permanent loss — but an expensive inconvenience all the same.

The £10,000 threshold and benefit-in-kind

There is a second, separate issue that runs alongside section 455. If your overdrawn DLA exceeds £10,000 at any point in the tax year and the company is not charging you at least HMRC’s official rate of interest, the cheap or interest-free loan is a taxable benefit-in-kind. That means:

• You pay income tax on the benefit, reported on a form P11D.
• The company pays Class 1A National Insurance on it.

This is easy to trip over, because £10,000 is not a large balance for a working director, and the test is whether you crossed it at any point — not just at the year-end.

Loans are a short-term tool, not a salary substitute

The temptation is obvious: dividends are taxed, salary is taxed, but a loan is not — so why not just borrow? Because it is not free money. It has to be repaid or it triggers section 455; over £10,000 it creates a benefit-in-kind; and if it becomes a habit, HMRC can argue the “loans” are really disguised remuneration and tax them accordingly. A director’s loan is a legitimate short-term bridge — covering a gap for a month or two — not a substitute for paying yourself a proper salary and dividends. If you are living off the loan account, something in your remuneration plan needs fixing. See how to pay yourself as a director in 2026/27.

The most common cause of an accidental overdrawn account

By far the most frequent way we see a DLA go overdrawn is not deliberate borrowing — it is dividends declared without sufficient distributable profits. A director draws regular “dividends” through the year based on cash in the bank, the year-end accounts show the company did not have enough distributable profit to cover them, and those dividends have to be reclassified — as a director’s loan. Suddenly there is an overdrawn DLA and a potential section 455 charge that nobody saw coming. The fix is upstream: only declare dividends you can lawfully pay, with the paperwork done in real time. Our post on keeping business and personal finances separate is the best preventative medicine here.

How MCC Partners can help

We help directors across Gravesend and the wider Kent area keep their loan accounts clean, plan repayments to sidestep the section 455 charge, and restructure drawings that have drifted into a loan when they should have been salary or dividends. If you suspect your DLA might be overdrawn — or you are not sure — that is exactly the kind of thing worth checking before the nine-month clock runs down.

Figures and tax rules are correct as at the date of writing (July 2026) and reflect the 2026/27 tax year. Tax rules change — and with a new Chancellor and an Autumn Budget expected, some may change again. Please check the current position or speak to us before acting on anything in this article.