Director’s loan accounts are common in personal and family companies.
Sometimes the company pays personal costs on behalf of a director. Other times, the director lends money to the company to help with cash flow.
Either way, it’s important to keep proper records. If a director’s loan account becomes overdrawn, there can be tax consequences for both the director and the company.
What is a director’s loan account?
A director’s loan account records money moving between the company and the director.
If the director owes money to the company, the account is overdrawn.
This might happen where the company has paid personal expenses, or where the director has taken money out of the business that has not been treated as salary, dividends or expense reimbursement.
Why can an overdrawn director’s loan cause problems?
If the outstanding loan is more than £10,000 at any point in the tax year, the director may face a benefit in kind tax charge.
The company may also have to pay Class 1A National Insurance on the taxable benefit.
There can also be a company tax charge.
If the loan is still outstanding nine months and one day after the company’s year end, the company may have to pay section 455 tax. For loans made on or after 6 April 2026, this rate is 35.75%.
The good news is that section 455 tax can usually be reclaimed if the loan is later repaid, released or written off. However, timing matters.
Can the company simply write off the loan?
At first glance, writing off the loan might seem like a simple fix.
Unfortunately, it’s not always that straightforward.
If a director’s loan is written off, waived or released, the director is usually treated as receiving a distribution. In plain English, this means it is taxed in a similar way to a dividend.
The director would need to report the write-off on their Self Assessment tax return.
What tax does the director pay?
The tax due depends on the director’s income and tax band.
Where the write-off takes place on or after 6 April 2026, the deemed distribution may be taxed at:
- 10.75% if it falls within the basic rate band
- 35.75% if it falls within the higher rate band
- 39.35% if it falls within the additional rate band
So, writing off the loan does not make the tax problem disappear. It can simply move the tax charge from the company to the director.
Can the company claim tax relief?
Usually, no.
Because the write-off is treated as a distribution, the company cannot normally deduct the amount written off when calculating its taxable profits for Corporation Tax.
If the company has already paid section 455 tax on the loan, it may be able to reclaim that tax after the loan is written off. The repayment must be claimed and is not automatic.
What about National Insurance?
This is another area where care is needed.
Although the write-off is treated like a distribution for income tax, it may be treated as earnings for National Insurance purposes.
That means both the director and the company could face Class 1 National Insurance costs.
In some cases, it may be possible to argue that the write-off relates to the director’s position as a shareholder rather than their work as an employee or director. If HMRC accepts that argument, National Insurance may not be due.
However, this is a technical area, and advice should be taken before relying on this position.
Is writing off the loan always the best option?
Not necessarily.
If the director is a higher-rate or additional-rate taxpayer, writing off the loan can be expensive.
In some cases, it may be better to leave the loan outstanding and pay the section 455 tax instead. This is because section 455 tax can be reclaimed if the director repays the loan later.
By contrast, once a loan is written off, the tax and National Insurance position may be harder to unwind.
What should directors do?
If your director’s loan account is overdrawn, don’t ignore it.
Before deciding whether to repay it, write it off, declare a dividend or leave it outstanding, it’s worth understanding the tax cost of each option.
A little planning can help avoid unexpected tax bills and cash flow problems.
If you’re unsure what to do with an overdrawn director’s loan account, please contact Jon or the team at Jon Davies Accountants.
We’ll help you review your options and choose the most tax-efficient approach for you and your company.
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