Director's Loans: How to Avoid Unexpected Tax Bills

As a business owner, there will probably come a time when you need to take money out of your limited company outside of your normal salary or dividends. It might be to cover a personal expense, help with a house purchase, or simply smooth your cash flow.

There's nothing unusual about that. In fact, director's loans are common in owner-managed businesses.

What many people don't realise, though, is that director's loan accounts come with some fairly strict tax rules. If they're not managed properly, they can trigger unexpected Corporation Tax charges, benefit-in-kind issues and additional reporting requirements.

With the Section 455 tax rate increasing for new loans made from 6 April 2026, it's more important than ever to keep an eye on your director's loan account.

Here's what you need to know.

What is a Director's Loan Account?

A director's loan account (DLA) simply records money moving between you and your company that isn't:

• Salary
• Dividends
• Reimbursed business expenses
• Genuine business purchases

If you've put your own money into the business, your company owes you, creating a credit balance.

If you've taken money from the company for personal use, and it isn't salary or dividends, you owe the company, creating an overdrawn (debit) balance.

For most small limited companies, this matters because they're classed as "close companies" for tax purposes. Broadly speaking, that's a company controlled by five or fewer shareholders, which covers the vast majority of owner-managed businesses.

According to government estimates, there were around 2.1 million actively trading companies in the UK at the start of 2025, so these rules affect a huge number of business owners.

When Does Section 455 Tax Apply?

If your director's loan account is overdrawn at the end of your company's accounting period and you haven't repaid it within nine months and one day after the year-end, your company may have to pay a Section 455 tax charge.

For loans made on or after 6 April 2026, the charge is 35.75%.

Loans made between 6 April 2022 and 5 April 2026 generally remain subject to the previous 33.75% rate.

For example:

If your company has a 31 March 2027 year-end and you borrow £40,000 in May 2026, but the balance is still outstanding on 1 January 2028, your company could face a Section 455 tax charge of £14,300.

The important point is that this tax is paid by the company, not you personally. It's reported through the Corporation Tax return using the

CT600A supplementary pages.

The good news is that Section 455 isn't a permanent tax. Once the loan is repaid, written off or released, the company can usually reclaim it. However, the money may remain with HMRC for quite some time, so it can still create a significant cash flow issue.

It's also worth remembering that:

• Several smaller withdrawals throughout the year can create exactly the same problem as one large loan.
• The rules generally apply to loans made to shareholders (participators) and people connected to them.
• Separate personal tax charges can also arise if the loan is interest-free or later written off.

Are There Any Exemptions?

Yes, although they don't apply to most owner-managed businesses.

The main exemptions include:

• Loans of £15,000 or less to a full-time employee or director who owns no more than 5% of the company.
• Normal commercial trade credit.
• Companies whose normal business is lending money.

For most small companies, it's safest to assume that an overdrawn director's loan account could trigger Section 455 unless it's cleared correctly and on time.

Don't Forget the £10,000 Rule

Section 455 isn't the only tax issue to be aware of.

If at any point during the tax year you owe the company more than £10,000, and you aren't paying interest (or you're paying less than HMRC's official rate), you could have a taxable benefit-in-kind.

HMRC's official interest rate is currently 3.75% (from 6 April 2025 and reviewed quarterly).

If this applies:

• You'll pay income tax on the interest you've effectively saved.
• The company must report the benefit on a P11D.
• The company also pays Class 1A National Insurance at 15% for 2026/27.

This catches more people than you'd think because it's completely separate from the Section 455 rules.

You could repay the loan quickly enough to avoid Section 455 altogether, but still have a taxable benefit because your balance exceeded £10,000 during the tax year.

The simplest way to avoid this is to keep the balance below £10,000 where possible. If that's not realistic, the company should charge interest at HMRC's official rate and make sure it's actually paid.

I'd also recommend having a proper written loan agreement that sets out the amount borrowed, interest rate and repayment terms.

Why Repaying and Borrowing Again Doesn't Work

Every year, HMRC sees directors repay loans just before the deadline before taking the money back out shortly afterwards.

They've introduced anti-avoidance rules specifically to stop this.

The first is the 30-day rule, which can apply where repayments of £5,000 or more are followed by new borrowing of £5,000 or more within 30 days.

The second is known as the arrangements rule. This can apply where at least £15,000 is outstanding before repayment and there was already an intention to borrow at least £5,000 again afterwards.

In both cases, HMRC looks at the substance of what's happened rather than simply the dates on your bank statement.

In short, if you're only repaying the loan so you can immediately borrow it again, don't expect it to solve the problem.

What If the Loan Is Written Off?

Sometimes directors simply can't repay the money.

While the company can write off a director's loan, it isn't usually the easy solution people hope for.

Where the director is also a shareholder, the amount written off is normally treated as a dividend for income tax purposes.

For 2026/27, dividend tax rates are:

• 10.75% for basic rate taxpayers
• 35.75% for higher rate taxpayers
• 39.35% for additional rate taxpayers

The dividend allowance remains just £500, so most of the written-off amount is likely to be taxable.

There may also be National Insurance and employment tax implications depending on the circumstances.

The company can generally reclaim any Section 455 tax once the loan has been released or written off, but the personal tax bill often makes this an expensive option.

Reclaiming Section 455 Tax

Although Section 455 can usually be reclaimed, the process isn't immediate.

HMRC only allows relief nine months and one day after the end of the accounting period in which the loan was repaid, released or written off.

To make the claim, you'll need details including:

• When the original loan was made
• The amount borrowed
• When it was repaid, released or written off
• The value of each repayment

If only part of the loan has been repaid, partial relief may still be available.

Why Good Records Matter More Than Ever

The increase to the new 35.75% Section 455 rate means many companies could now have older loans at 33.75% alongside newer loans taxed at the higher rate.

When repayments are made, it's sensible to record exactly which loan they're intended to clear.

Without clear records, HMRC may apply default rules that don't produce the most tax-efficient outcome.

It doesn't need to be complicated.

Even a simple email confirming that a repayment relates to a specific loan can make life much easier if questions arise later.

Practical Tips to Stay Out of Trouble

Director's loan accounts don't need to become a headache, provided you stay on top of them.

I'd recommend:

• Reviewing your director's loan account every month rather than waiting until year-end.
• Planning dividends properly and only paying them when sufficient retained profits exist.
• Keeping an eye on the £10,000 benefit-in-kind threshold.
• Avoiding artificial repayments followed by immediate re-borrowing.
• Having written loan agreements for larger balances.
• Clearly recording which loans repayments relate to.
• Reviewing the position well before your company year-end while you still have planning options available.

Final Thoughts

Director's loan accounts can be a useful way of managing cash flow and giving yourself flexibility as a business owner.

The problems only tend to arise when they're left unchecked.

With the Section 455 rate now increasing to 35.75% for new loans from 6 April 2026, it's well worth reviewing your position regularly rather than waiting until the accounts are prepared.

If you're unsure whether your director's loan account is causing a tax issue, or you're thinking about taking money from your company, I'd always recommend getting advice early.

A quick conversation now could save you a much larger tax bill later.

If you'd like us to review your director's loan account or answer any questions, please get in touch.

We'd be happy to help.