Director's Loan Account: the Tax Traps and How to Avoid Them

A director's loan account is one of those areas where a small misunderstanding of the rules can turn a routine year-end entry into a five-figure tax charge. The mechanics are straightforward once you know them — but the timing requirements are tight, the anti-avoidance rules have teeth, and the interaction with dividend planning catches people out regularly.

This article covers the S455 charge, the 9-month repayment window, bed and breakfasting, and how to think about DLA management as part of a broader extraction strategy.

What is a director's loan account?

A director's loan account (DLA) records money flowing between a director and their company outside of salary, dividends, or expenses. If you draw more than you've put in — or more than has been formally declared as salary or dividends — the account is overdrawn and you owe the company money.

An overdrawn DLA is not automatically a problem. Companies lend money to directors all the time. But if the DLA is still overdrawn nine months after the company's accounting year end, HMRC steps in with the S455 charge.

The S455 charge

Section 455 of the Corporation Tax Act 2010 imposes a tax charge on the company — not the director personally — equal to 33.75% of the outstanding overdrawn DLA balance at the accounting year end. The rate mirrors the higher rate of dividend tax and has been 33.75% since April 2022.

The charge is due on the same date as the rest of the company's Corporation Tax: nine months and one day after the end of the accounting period. A company with a 31 March 2026 year end has until 1 January 2027 to pay any S455 due.

The 9-month window

The S455 charge only applies to loans still outstanding at the year end. If the DLA is cleared — by repayment, dividend, or bonus — before the year end, there is no charge. And if it's cleared after the year end but before the S455 due date (nine months and one day later), there is still no charge — as long as the repayment happens before that payment deadline.

In practice this gives a director two windows:

1. Before year end: Repay or clear the DLA before the accounting period closes. No S455 arises. This is the cleanest option.
2. After year end, before nine months and one day: Repay the loan and notify HMRC that the S455 charge is not due. The company must still report the DLA on the CT600A, but no tax is payable if the loan is cleared in time.

Missing both windows means paying the S455 charge and waiting for the refund — which, as the example above shows, can mean HMRC holding a significant sum for twelve months or more.

Bed and breakfasting: the 30-day trap

HMRC is aware that directors can repay a loan shortly before the year end and then redraw it shortly after, effectively manufacturing a nil balance at year end while the economic position hasn't changed. Section 464C CTA 2010 blocks this.

The rule works as follows: if a director repays £5,000 or more to their DLA within 30 days of the year end — whether before or after — and then redraws the same amount (or intends to redraw it) within 30 days, HMRC treats the repayment as not having happened for S455 purposes. The loan is treated as still outstanding.

There is also a broader arrangement-based rule (s464A CTA 2010) that catches any arrangement where the purpose is to avoid the S455 charge, regardless of the 30-day window. A scheme structured to repay a loan and immediately re-advance it through a connected party will fall within this.

Clearing the DLA with a dividend

The most common way to clear an overdrawn DLA without moving cash is to declare a dividend. If the company has distributable reserves, the board can resolve a dividend equal to the overdrawn balance. The dividend credits the DLA, bringing it to nil. No cash needs to change hands.

This is legitimate and widely used — but there are conditions that must be met:

• Distributable reserves must exist. A dividend drawn against a company with no retained profits (or net liabilities) is an unlawful distribution under the Companies Act. The DLA balance doesn't go away; the director has simply borrowed more.
• The dividend must be formally declared. A resolution should be minuted. The date of declaration determines when the dividend legally takes effect for DLA clearing purposes — not the date it appears in Xero or is posted by the accountant.
• The director must actually be entitled to the dividend. If there are other shareholders with equal or prior rights, a dividend clears the DLA for the amount their shareholding represents. A director who is a minority shareholder cannot declare a dividend solely to clear their own DLA without also paying other shareholders.

Clearing the DLA with a bonus

A director's salary or bonus also credits the DLA. Unlike a dividend, it is not restricted to distributable reserves — a company can pay a bonus even if it has accumulated losses, provided it has the cash or overdraft facility to do so.

The tax cost is higher: a bonus is subject to Employer NI at 15%, Employee NI at 8% up to the upper earnings limit, and income tax at the director's marginal rate. For most director-shareholders, dividends are significantly more efficient as a clearing mechanism, assuming distributable reserves are available.

Beneficial loan charge

If the DLA is overdrawn and the company does not charge the director a commercial interest rate, a further charge arises under the beneficial loan rules (ITEPA 2003, Part 3, Chapter 7). The official rate for 2025/26 is 2.25%. If no interest is charged, the director is treated as receiving a benefit in kind equal to interest at the official rate on the average overdrawn balance during the year.

The benefit in kind is relatively modest at current official rates, but it must be reported on the P11D and does create an employer Class 1A NI charge of 13.8% on the benefit value. For large or persistent DLAs, the benefit charge adds up over multiple years.

To avoid it entirely, the company can charge interest on the DLA at or above the official rate. The interest received by the company is taxable income; the director may or may not be able to claim a deduction depending on how the loan proceeds were used.

Optimal repayment strategies

There is no universal answer — it depends on the company's profit position, distributable reserves, and the director's personal tax position for the year. The main options in rough order of preference:

1. Declare a dividend before year end — cleanest outcome if reserves exist. No cash movement required. Dividend is taxed at 8.75% (basic rate band) which is usually more efficient than leaving S455 to arise.
2. Repay before the nine-month deadline — avoids S455 but requires genuine cash repayment. Suitable if the director has funds available (e.g., from a separate source) and the loan is genuinely temporary.
3. Allow S455 to arise and repay in the following year — only sensible if cash is genuinely not available and the company expects significant profit in the next period. The refund timeline makes this expensive.
4. Formalise with a written loan agreement and charge interest — appropriate for large or long-running DLAs where repayment is not imminent. Mitigates the beneficial loan charge and demonstrates the arrangement is commercial rather than an informal overdraft.

DLA and the wider extraction picture

DLA management is rarely separate from the dividend and extraction planning conversation. An overdrawn DLA often exists because the director drew funds informally during the year — before the accountant had confirmed the available profit and the correct dividend figures. The DLA is the holding account for those drawings.

The right approach is to treat the DLA as a running tally and review it quarterly alongside the profit position. If the account is building up, the question is whether there is profit to declare a dividend against, and whether doing so now or at year end produces the better tax outcome.

Key figures for 2025/26