An overdrawn director's loan account in the UK — section 455 tax, benefit in kind, and what a lender makes of it

An overdrawn director's loan account is what you have when a director has taken more out of the company than they have put in, and that amount is not salary, bonus or a declared dividend. It sits on the balance sheet as a debtor — an asset the company is owed, not one it holds. Leave it unpaid more than nine months and one day after the company's accounting period ends, and the company faces a Corporation Tax charge under section 455 of the Corporation Tax Act 2010, currently up to 35.75% of the outstanding balance. On top of that, a large or cheap loan can trigger a benefit in kind and National Insurance on the director personally. None of this is exotic tax planning gone wrong — it is the single most common thing a credit team flags when they open a set of small company accounts.

Key takeaways

What counts as an overdrawn director's loan account

A director's loan account (DLA) is a running record of money a director borrows from, or lends to, their own company, kept entirely separate from salary, bonuses or dividends. It picks up cash withdrawals from the business, personal expenses paid on a company card, and business expenses the director has covered personally and not yet claimed back. When the balance tips the wrong way — the director owes the company more than the company owes the director — the account is overdrawn.

Under the Companies Act 2006, companies are allowed to lend to their directors; the old blanket prohibition was removed. In its place is a requirement for prior shareholder approval under section 197 of the Act for loans over £10,000, subject to the exceptions in section 207. In a small owner-managed company where the director is also the sole shareholder, this is usually a formality rather than a real obstacle — but it still needs to be documented, and Companies Act section 413 requires the amount of any loan advanced during the year, its interest rate, main terms, and any amount repaid or written off to be disclosed in the accounts. That disclosure is exactly what a lender, or HMRC, will read first.

This all applies to close companies — companies controlled by five or fewer participators, or by any number of participators if they are all directors, which covers the overwhelming majority of owner-managed limited companies.

The section 455 charge and the nine-month deadline

Section 455 tax is charged on the company if an overdrawn director's loan is still outstanding nine months and one day after the end of the accounting period in which it arose. The rate is not fixed — it tracks the dividend upper rate, and has moved three times:

Loan made	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%

Three situations sit outside section 455 altogether: loans made in the ordinary course of a money-lending business, trade credit for goods or services not exceeding six months (or whatever period is normally given to customers), and loans of up to £15,000 to an employee who does not have a material interest in the company — broadly, someone who, with any associate, does not control more than 5% of the ordinary share capital. In practice, the owner-director of a small company almost never qualifies for that last exception, because they are the material interest.

Worked example. A director owes the company £10,000 at the year end and it is not repaid in time. At 33.75%, the company pays an additional £3,375 in Corporation Tax. At £20,000 outstanding, the same 33.75% rate produces a £6,750 charge. On a £20,000 balance falling under the new 35.75% rate — a loan made on or after 6 April 2026 — the charge rises to £7,150. On a smaller balance, say £6,000 overdrawn at a 31 July year end and still outstanding the following 1 May, the charge at 32.5% comes to £1,950. The rate that applies is set by when the loan was made, not by when you happen to be doing the sums, so check the date against the table above rather than assuming the current rate applies to an older balance.

Getting the tax back

If the loan is repaid in full before the nine-month-and-one-day deadline, no section 455 tax is due at all — but the loan still has to be recorded in the Company Tax Return, and relief claimed via form CT600A. Where the balance was not cleared in time and the tax was paid, it becomes repayable once the loan is eventually repaid or released, nine months and one day after the end of the accounting period in which that repayment happens. Where the reclaim relates to the original accounting period and is made within two years of it, use CT600A; where the tax return is for a different accounting period, or is being amended, use form L2P instead. The claim window for the repayment itself is four years.

This is a temporary tax, but the gap between repaying the loan and actually getting the money back from HMRC can be nine months or more — a real cash-flow cost for a company that has already found the money once to clear the balance, then has to fund the company's ordinary tax bill while it waits for the section 455 refund to land.

Benefit in kind and National Insurance on a cheap loan

Section 455 is not the only cost. If a director's loan is interest-free, or charged below HMRC's official rate, and the balance exceeds £10,000 at any point in the tax year, the difference between interest at the official rate and whatever was actually paid is treated as a benefit in kind. For 2026/27 the official rate of interest is 3.75%, unchanged from 2025/26 and up from 2.25% in 2024/25 — that is the rate used to calculate the notional interest.

On an ongoing beneficial loan like this, the company pays Class 1A National Insurance on the benefit — currently 15% from 6 April 2025, up from 13.8% before that date. It is reported on form P11D, which must reach HMRC by 6 July following the end of the tax year, with the Class 1A National Insurance itself due by 19 July, or 22 July if paying electronically. This charge falls on the company, not the director, though the benefit still has to be declared on the director's own P11D.

One way to reduce or remove this exposure is straightforward: if the director actually pays interest to the company at or above the official rate, there is no benefit in kind to tax, and the interest received is simply taxable company income, chargeable to Corporation Tax as a non-trade loan relationship credit.

Bed-and-breakfasting: why clearing the balance before the deadline doesn't always work

HMRC's anti-avoidance rules, in force since 20 March 2013, stop a director from temporarily repaying a loan just before the nine-month deadline and quietly re-borrowing it afterwards.

The 30-day rule applies where, within any 30-day period, there are both repayments totalling £5,000 or more and additional loans totalling £5,000 or more. In that case, the repayment is matched against the new loan first, rather than against the original balance — so the original loan is treated as if it had not been repaid at all for section 455 purposes.

A second, broader arrangements rule applies where the amount outstanding is at least £15,000 before any repayment is made, and arrangements exist for at least £5,000 of new loans to be advanced. This one has no time limit attached to it at all, so a longer gap between repayment and re-borrowing does not put you outside its reach if the arrangement was there from the start.

There is a genuine carve-out: these rules do not apply where the repayment itself already creates an Income Tax charge on the director — a dividend, salary or bonus credited against the loan account, for instance. HMRC's own manual confirms rent payments do not qualify for that carve-out, so paying down a DLA with rental income from the director does not escape the rule.

The practical implication is simple: a loan cleared and re-drawn as a stopgap around the accounting deadline is very unlikely to work, and dressing up the repayment as something other than a genuine, permanent clearance of the balance is exactly what these rules were built to catch.

Writing off the loan

Writing off an overdrawn DLA does not make the underlying problem disappear, it converts it into a different one. The company must formally waive the debt — simply agreeing not to chase it leaves the liability technically in place. Once properly written off, the amount is taxed on the director as a deemed dividend (ITTOIA 2005 s415). For National Insurance, HMRC treats the amount written off as earnings, so Class 1 National Insurance is due through payroll — a different charge from the Class 1A that applies to an ongoing beneficial loan.

Section 455 tax already paid on the loan does not simply vanish either — it remains reclaimable, but only once the same nine-month-and-one-day rule has run from the end of the accounting period in which the write-off happened. The company also gets no Corporation Tax relief on the amount written off; it is not treated as a deductible trading expense.

Writing off a DLA does not become automatic just because the company goes into liquidation. In Quillan v HMRC (2025), a tribunal found that a director's partial repayment during liquidation, made without any formal write-off agreement in place, did not trigger the income tax charge that applies to a genuine write-off. The loan remains a debt the company — or its liquidator — can still pursue, right up until someone actually agrees to waive it.

What a lender makes of it

An overdrawn director's loan account sits on the balance sheet as an asset, but it is not an asset a lender treats the same way as stock, debtors from genuine trade customers, or cash. It is money the business has parted with to its own director, recoverable only if the director can and will repay it personally — and Companies Act disclosure rules mean it is visible in the accounts, not hidden in a general debtors line.

A credit assessor reading a set of accounts sees three things in a large or growing DLA. First, it usually means profit is being drawn out of the business informally, ahead of a properly declared dividend or salary, which understates what the company is actually retaining to fund growth or absorb a bad month. Second, because the balance depends entirely on the director's personal means for recovery, it is treated as a weak asset when working out real net worth — a lender is unlikely to count it toward the company's tangible strength, and will often want it cleared, or converted into a properly documented and serviced loan, before completing a facility. Third, it is a governance signal. An overdrawn DLA is involved in a large share of business insolvencies, and where a director keeps drawing against the loan account after they knew, or ought to have known, the company was in financial difficulty, that can be treated as wrongful trading or misfeasance — and an appointed insolvency practitioner has a legal duty to pursue repayment of the balance for creditors. Directors have been disqualified from acting as a director for up to fifteen years over conduct connected to an overdrawn loan account.

None of that means a DLA is fatal to an application. A small, temporary balance that gets cleared inside the nine-month window and does not recur tells a lender nothing alarming. A large balance that grows year on year, or one that gets cleared just before the year end and reappears straight after, tells a different story — and it is the story a credit team reads first, before they read anything you send them about the business.

Frequently asked questions

What is the deadline to repay an overdrawn director's loan? Nine months and one day after the end of the company's accounting period. Miss it, and the company owes section 455 tax on the balance still outstanding at that date.

Can I avoid section 455 tax by repaying the loan and borrowing it straight back? Not if the repayment and the new loan happen close together. The 30-day rule and the arrangements rule match the repayment against the new borrowing, so the original loan is treated as never having been repaid for tax purposes.

Does writing off the loan get rid of the tax charge? No. Writing off the loan creates a fresh Income Tax and Class 1 National Insurance liability of its own, and the section 455 tax already paid only becomes reclaimable once the same nine-month rule has run from the write-off date.

Does an overdrawn director's loan account automatically get written off if the company is liquidated? No. The Quillan v HMRC (2025) tribunal confirmed that a loan is not automatically treated as written off just because the company enters liquidation and recovery looks unlikely — it remains a debt the liquidator can pursue unless it is formally waived.

Will an overdrawn DLA stop me getting finance? Not on its own, but a lender will ask about it, and a large or recurring balance weakens how they view the company's real net worth and cash discipline. Clearing it, or converting it into a documented and serviced loan, before you apply puts a stronger set of accounts in front of the credit team.

We read the accounts the way a lender's credit team does before a facility ever gets applied for, and an overdrawn director's loan account is one of the first things we flag with a client so it can be dealt with, or at least explained, before an underwriter sees it cold. If you are weighing this up against why business loan applications get declined or what lenders look at more generally, both cover the same balance-sheet read from the other side of the desk. New Zealand readers working through the equivalent issue should see the shareholder current account version of this article.

If you are planning to borrow and want the balance sheet in shape first, talk to Deplexifi about UK business finance.

Assuming a repay-and-redraw around the year end clears the balance — HMRC's bed-and-breakfasting rules match the repayment against the new loan and the section 455 charge still applies.

Nothing here is regulated financial advice. Deplexifi arranges commercial finance for businesses — this article describes general lending practice and the published position of the sources listed below, not a recommendation for any individual business.