Director's Loan Account Explained

35.75%. That's the tax rate your company faces this year on an overdrawn director's loan left unpaid too long — higher than the main rate of corporation tax itself, and rising again for 2026/27 on the back of the dividend tax increase. It's one of the more expensive mistakes a director can make, and one of the easiest to avoid entirely, provided you understand how the rules actually work.

I've had this exact conversation more times than I can count: a director glances at the company bank balance, sees a healthy figure sitting there, and transfers some of it to themselves personally — reasoning that it's "their" company, so it's "their" money. Legally, it isn't quite that simple. The moment money moves between you and your company outside of salary, dividends, or a genuine expense reimbursement, you've created a director's loan, and director's loans come with their own set of rules, deadlines, and tax charges that catch out even experienced business owners.

This guide walks through exactly what a director's loan is, when it becomes a problem, what Section 455 tax actually costs you, and — most importantly — how to keep your own loan account clean.

What Is a Director's Loan?

The Running Account Concept

A director's loan account isn't a single transaction — it's a running balance, tracked continuously through the year, of everything that's passed between you and your company outside of salary, dividends and legitimate expense claims. Every personal withdrawal adds to it. Every repayment reduces it. At any given moment, the account is either in credit (the company owes you) or overdrawn (you owe the company), and it's that overdrawn position that carries the risk.

What Counts as a Director's Loan

Personal bills paid from the company account, cash withdrawn without a corresponding salary or dividend, a company car bought and used personally without proper benefit-in-kind treatment — all of it lands in the director's loan account by default, whether or not anyone formally labelled it that way at the time.

Why It's Treated Differently From Salary or Dividends

Salary is taxed through PAYE as it's paid. Dividends are taxed against declared, distributable profits, with proper paperwork behind them. A director's loan is neither — it's simply money that's moved without going through either of those recognised routes, and HMRC treats it with a corresponding degree of caution, because historically it's been used to extract value from companies while deferring, or entirely avoiding, the tax that salary and dividends would otherwise attract.

Can I Borrow Money From My Limited Company?

There's No Blanket Ban

Yes, you can borrow from your own company — there's nothing inherently prohibited about it. Plenty of legitimate reasons exist: a short-term cash flow gap personally, covering an unexpected cost before your next dividend is due, or simply timing convenience.

Company Law Considerations

For larger loans, company law itself comes into play — loans to directors above certain thresholds may need formal shareholder approval, and if you're the sole director and shareholder, that's a formality rather than an obstacle, but it's still worth documenting properly rather than skipping entirely.

Practical Limits Worth Respecting

Just because you can borrow doesn't mean you should borrow without a plan for repayment. I've seen loan accounts creep up gradually, £500 here, £1,000 there, until a director is genuinely startled to discover they owe their company £18,000 with no clear route to clearing it before the tax consequences bite.

What Happens If I Owe My Company Money?

The Nine-Month Rule

This is the deadline that matters most. If your director's loan account is overdrawn at your company's year end, and it isn't repaid within nine months of that year end, your company faces a tax charge on the outstanding balance. Nine months sounds generous. In practice, it arrives faster than most directors expect, particularly if the balance built up gradually and nobody was watching the running total.

Reporting the Loan in Your Accounts

An overdrawn director's loan has to be disclosed in your company's accounts, visible to anyone who looks — Companies House filings, a future buyer during due diligence, a lender assessing the business. It isn't a private arrangement that stays hidden in the background.

How It Looks to a Lender or Buyer

I've had clients come to us mid-way through arranging finance or a sale, only to discover a sizeable overdrawn loan account is raising uncomfortable questions from the other side of the table. A large, longstanding director's loan doesn't necessarily kill a deal, but it invites scrutiny at exactly the moment you'd rather things looked clean.

When Does a Director's Loan Become Taxable?

The Trigger Point

The nine-month deadline is the trigger. Miss it, and Section 455 tax becomes due from the company on the outstanding balance — regardless of whether you eventually intend to repay it. The tax is charged simply because the deadline passed, not because the loan is permanent.

Company-Level vs Personal-Level Tax

There's an important distinction here that trips people up. Section 455 tax is a charge on the company, not on you personally. But if the loan is interest-free, or charged at below HMRC's official rate, there's a separate personal benefit-in-kind charge that can also apply — meaning a single overdrawn loan can trigger tax at both levels simultaneously.

Loans Under £10,000 vs Over

The size of the loan changes which rules bite. Below £10,000, the benefit-in-kind charge for cheap or interest-free borrowing generally doesn't apply, even though Section 455 still can if the loan remains outstanding past the nine-month deadline. Cross £10,000 at any point in the year, even briefly, and the benefit-in-kind rules switch on — we cover this properly further down this guide.

What Is Section 455 Tax?

How the Charge Is Calculated

Section 455 tax is calculated on the amount of the loan still outstanding nine months after your company's year end, at a rate that tracks the dividend upper rate — deliberately, so that an unpaid loan doesn't become a quietly cheaper alternative to a properly declared dividend.

The 2026/27 Rate — 35.75%

For 2026/27, that rate is 35.75%, up from 33.75% the previous year, following the same Autumn Budget 2025 changes that pushed up dividend tax generally. On a £20,000 overdrawn balance left unpaid past the deadline, that's a £7,150 tax charge landing on the company — a genuinely significant sum for what often started as a series of small, unplanned withdrawals.

When It's Due and How It's Reported

Section 455 tax is reported on the company's Corporation Tax Return and paid alongside the corporation tax itself, nine months and one day after the year end — which, not coincidentally, is exactly when the nine-month repayment window for the loan closes. Miss the repayment deadline, and the tax is simply added to what's due.

What Happens If I Repay the Director's Loan?

Reclaiming Section 455 Tax

Here's the good news: Section 455 tax isn't a permanent loss. Once the loan is genuinely repaid, the tax already paid becomes reclaimable from HMRC. The bad news is the timing — the refund isn't immediate, and depending on when repayment happens relative to your company's tax filing cycle, it can take a while to actually land back in the company's bank account. It's real cash tied up in the meantime, not just a paperwork inconvenience.

The "Bed and Breakfasting" Rules

This is where directors sometimes try to get clever, and where HMRC has specifically closed the door. Repaying a loan just before the deadline, only to draw a similar amount straight back out again shortly afterwards, is exactly the kind of manoeuvre these anti-avoidance rules exist to catch.

The 30-Day Rule

If a loan repayment of £5,000 or more is followed by a new loan of £5,000 or more within 30 days, HMRC can match the repayment against the new borrowing and treat it as though the original loan was never actually repaid — meaning the Section 455 charge still applies as if nothing had changed.

The £15,000 Arrangements Rule

A separate rule catches larger-scale, more deliberate cases: where a director already owes £15,000 or more, and there's a clear intention at the time of repayment to draw down further borrowing, HMRC can look through the transaction even outside the 30-day window. It's aimed squarely at the "repay it on paper to dodge the tax, then carry on as before" strategy — one that simply doesn't work, and one we'd never recommend a client attempt.

Director's Loan – £10,000 Benefit-in-Kind Rules

The Official Rate of Interest — 3.75%

HMRC sets an official rate of interest each tax year, used to work out whether a loan has been provided on beneficial terms. For 2026/27, that rate is 3.75%, and — worth noting — it's no longer guaranteed to stay fixed for the whole year; HMRC reviews it quarterly and can adjust it mid-year if interest rates move significantly.

Calculating the Benefit

If your loan balance goes above £10,000 at any point during the tax year, and it's interest-free or charged below the official rate, the difference between what you actually paid and what you would have paid at 3.75% is treated as a taxable benefit in kind.

P11D Reporting and Class 1A NIC

That benefit gets reported on your P11D, taxed as personal income, and the company pays Class 1A National Insurance on it too — a double layer of cost that a lot of directors don't anticipate the first time a loan balance creeps past £10,000, even briefly.

How to Avoid Director's Loan Account Problems

Reconcile the Account Regularly

The single biggest cause of director's loan problems isn't recklessness — it's simply losing track. A withdrawal here, a personal bill paid from the company account there, and six months later nobody has a clear picture of the running balance. Reconciling the account monthly, or at the very least quarterly, means there are no surprises waiting at year end.

Plan Repayment Before the Year-End Deadline

If you know your loan account will be overdrawn at year end, start planning the repayment — through a bonus, a dividend, or genuine cash injection — well before the nine-month deadline arrives, not in the final fortnight when options are limited and decisions get rushed.

Formalise Larger Loans

For anything beyond a small, short-term balance, put proper terms in writing: an agreed interest rate, a repayment schedule, board approval where appropriate. It protects you if HMRC ever asks questions, and it's simply good practice for running the company properly.

Talk to Us Before You Draw, Not After

The conversation that saves clients the most money is always the one that happens before a large personal withdrawal, not after. If you're planning to draw a significant sum from the company outside your normal salary and dividend routine, a quick check with us first can be the difference between a clean, planned transaction and an expensive surprise nine months down the line.

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A director's loan account isn't something to fear — it's a genuinely useful piece of flexibility, provided it's managed with the same discipline you'd apply to any other part of the business. If your own loan account needs a proper review, or you're planning a withdrawal and want to check the tax consequences before you make it, get in touch with the team at Cannon Accountants. It's a conversation worth having early.

For the wider view of how director's loans fit alongside salary, dividends, benefits in kind and everything else covered in this series, head back to our complete Limited Company Tax Guide 2026/27: Corporation Tax, Dividends & Director Tax →.

Disclaimer:

The content of this blog is for general informational purposes only and should not be considered professional tax advice. The information is correct at the time of publishing but may change following future UK budget announcements or updates to HMRC guidance. Individual circumstances vary, and tax obligations can differ based on your personal situation. We strongly recommend consulting with us or a qualified tax professional to receive advice tailored to your specific needs.