If you’re a director of a small or family-owned company, chances are you’ve dipped into your director’s loan account (DLA) at some point — or even lent money to the business when cash flow was tight. A DLA is simply a record of all financial transactions between you and your company, from salary and dividends to personal expenses paid through the business.
But if your DLA becomes overdrawn, even temporarily, there are important tax consequences to consider. Getting it wrong can lead to an unexpected Corporation Tax bill, benefit-in-kind charges, and even anti-avoidance scrutiny from HMRC.
Let’s walk through what you need to know.
What Counts as an Overdrawn Director’s Loan Account?
Your DLA becomes overdrawn when you owe the company money. This can happen for many reasons:
- You’ve borrowed funds from the company
- The company has paid your personal expenses
- Dividend or salary credits haven’t yet been posted
- You’ve taken drawings that exceed available reserves
Whether intentional or accidental, an overdrawn balance can trigger tax obligations — particularly for close companies, which include most personal and family-run businesses.
Close Companies and Why It Matters
A close company is broadly one controlled by either:
- five or fewer participators (people with an interest in the company’s income or capital), or
- any number of participators who are also directors.
If your business falls into this category, HMRC expects you to follow specific rules when a DLA is overdrawn at year end.
What happens next depends on whether the loan is cleared within nine months and one day of your accounting year end — the point at which your Corporation Tax is due.
If the Loan Is Repaid Quickly
If you repay the full loan within the nine-month window, you won’t face a Section 455 charge. However, the company still needs to:
- declare the loan on the CT600A section of the tax return, and
- report the amount owed at year end and the date(s) on which repayments were made.
This keeps HMRC in the loop and avoids penalties later.
If the Loan Is Still Outstanding: Section 455 Tax
When an overdrawn loan remains unsettled nine months and one day after the year end, the company must pay Section 455 tax on the outstanding balance.
Key facts:
- Section 455 tax is charged at 33.75%, aligned with the upper dividend rate.
- It’s paid with Corporation Tax but is not Corporation Tax itself.
- It’s a temporary tax — HMRC repays it nine months and one day after the accounting period in which the loan is fully cleared.
HMRC also has anti-avoidance rules to prevent directors from repaying a loan just before the deadline and then immediately borrowing the funds back.
Should You Clear the Loan — or Pay Section 455 Tax?
Clearing the DLA before the deadline avoids Section 455 tax. You can do this by:
- injecting personal cash,
- declaring a dividend, or
- paying yourself a bonus.
But this isn’t always the most tax-efficient option.
For example:
- A dividend may trigger income tax.
- A bonus may attract both income tax and employee/employer National Insurance.
In some cases, it may be better to pay the Section 455 tax temporarily and clear the loan later, when you can do so more tax efficiently.
Benefit-in-Kind Charges on Loans Over £10,000
If your loan balance exceeds £10,000 at any point during the tax year, HMRC treats it as a taxable benefit unless you pay interest at the official rate.
This means:
- You may face an income tax charge on the benefit figure.
- The company will also owe Class 1A National Insurance on the same amount.
This applies even if you clear the loan before the year end.
Need Help Managing a Director’s Loan Account?
Director loan accounts can get complicated quickly — and unexpected tax bills are the last thing any business owner needs. If you’d like help managing your DLA, planning repayments, or understanding Section 455 tax, get in touch with Jon or the team at Jon Davies Accountants. We’ll guide you through the most tax-efficient route for your situation.
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Any questions?
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