Use our UK sole trader tax calculator to estimate 2026/27 Income Tax, National Insurance and student loan repayments for Self Assessment. to plan your tax.
November 5, 2026
Quick Summary: A director’s loan account is the most common source of unexpected corporation tax bills in owner-managed companies, usually because nobody was aware a loan existed until the accounts were drawn up. This guide covers what actually determines your exposure: the two entirely separate tax charges that can apply at once, the nine-month deadline and the rate change that took effect on 6 April 2026, why the £10,000 threshold is tested across the whole tax year rather than at year end, the four routes out of an overdrawn balance with the real cost of each, why repaying just before the deadline and redrawing afterwards does not work, what writing the loan off actually costs, and how to get the s455 tax back once the balance is cleared.
Very few directors set out to borrow from their company. Most end up overdrawn by accident, and usually through one of two routes.
Drawings taken on account: Money is withdrawn month by month to live on, with the intention of formalising it as dividends later. If the paperwork never follows, those drawings are loans.
Dividends declared without distributable reserves: A dividend can only be paid out of accumulated realised profits. If the company did not have the reserves to cover what was taken, the payment is not a valid dividend at all. It reverts to being a loan, retrospectively, often a year after the money was spent.
Both produce the same result: an overdrawn director’s loan account discovered at the point the accounts are prepared, with a nine-month clock that has already been running.
That is why this topic matters more than its dry name suggests. The tax charge is substantial, the deadline is fixed, and by the time most directors find out about it the easy options have already narrowed.
A director’s loan account is simply a record of money moving between a director and their company that is neither salary, nor dividend, nor a legitimate expense reimbursement.
It runs in both directions.
In credit: Means the company owes the director, typically because they put money in at the start, paid company costs personally, or left declared dividends undrawn. This is entirely unproblematic, and the money can be taken back out with no tax at all.
Overdrawn: Means the director owes the company. This is where the tax charges live.
The account must be recorded in the company’s books and disclosed in the accounts. Being overdrawn is not illegal and is not, in itself, a problem. Leaving it overdrawn past the deadline is what costs money.
This is the structural point most guides miss. An overdrawn account can trigger two different charges with different triggers, different payers and different thresholds. They are not alternatives.
|
Section 455 tax |
Beneficial loan charge |
|
|
What triggers it |
Balance outstanding 9 months and 1 day after the accounting period end |
Balance exceeding £10,000 at any point in the tax year, with interest below the official rate |
|
Who pays |
The company |
The director pays income tax; the company pays Class 1A NIC |
|
Rate |
35.75% of the balance |
Income tax on interest at 3.75%; Class 1A at 15% |
|
Reported on |
CT600A |
P11D and the director’s tax return |
|
Refundable? |
Yes, once the loan is cleared |
No |
|
Based on |
The company’s accounting period |
The tax year, 6 April to 5 April |
Note the mismatch at the bottom of that table. The two charges run on different calendars, so a loan can be clear of one and squarely inside the other.
Section 455 of the Corporation Tax Act 2010 applies where a close company, broadly, one controlled by five or fewer participators, lends money to a participator and the loan is not repaid quickly.
The deadline is nine months and one day after the end of the company’s accounting period. That is the same date the corporation tax itself falls due. If any of the overdrawn balance remains at that point, the company pays section 455 tax on it.
The charge falls on the company, not the director. That surprises people, and it is why the first a director sometimes hears of it is a corporation tax bill considerably larger than expected.
The section 455 rate tracks the upper rate of dividend tax, and that rose at the start of the current tax year.
|
When the loan or advance was made |
Rate |
|
On or after 6 April 2026 |
35.75% |
|
6 April 2022 to 5 April 2026 |
33.75% |
A great deal of guidance still in circulation quotes 33.75% as the current figure. It is not, for anything drawn since April 2026.
The rate attaches to the advance, not to the company. A company can therefore have both rates running at once, older drawings at 33.75% and newer ones at 35.75%, which matters particularly for year ends that straddle April 2026.
Working example: Your company’s year end is 31 March 2027. You draw £40,000 in May 2026 and the balance is still outstanding at the year end.That £14,300 is recoverable later, but it leaves the company at the point it falls due and does not come back for a long time.
This is the second charge, and it catches people who have already dealt with the first.
If the total balance owed by a director exceeds £10,000 at any point during the tax year, and the company charges no interest or charges below HMRC’s official rate, the director has a taxable benefit.
Two details matter.
“At any point” means exactly that. A balance that peaked at £14,000 in August and was back to £3,000 by 5 April still triggers the charge. It is not a year-end test.
The official rate of interest is 3.75%, and has been since 6 April 2025. It remains at 3.75% for 2026/27, though it is now subject to in-year review, so it is worth checking before you calculate.
Working example: A director’s loan stands at £30,000 on 6 April and £20,000 on 5 April the following year.
|
Average balance |
£25,000 |
|
Official rate |
3.75% |
|
Taxable benefit |
£937.50 |
|
Income tax at 40% |
£375.00 |
|
Company’s Class 1A NIC at 15% |
£140.63 |
|
Combined cost |
£515.63 |
The charge disappears entirely if the company charges interest at or above the official rate, but the interest has to be actually paid, not merely recorded as an intention.
The right route depends on the company’s reserves, the director’s other income and how much cash is available. Here is what each actually costs on a £30,000 overdrawn balance.
|
Route |
What happens |
Cost on £30,000 |
|
Repay in cash |
Director pays the money back from personal funds before the deadline |
Nothing in tax, but you need £30,000 |
|
Declare a dividend |
Dividend credited to the loan account, clearing it |
Dividend tax personally, £10,725 at the 35.75% upper rate. Requires distributable reserves |
|
Pay a salary or bonus |
Processed through payroll and credited to the account |
Income tax plus employee and employer NIC. Usually the most expensive route |
|
Leave it outstanding |
Company pays section 455 |
£10,725, refundable later, plus any beneficial loan charge |
Two observations worth drawing out.
The dividend route and the section 455 charge cost almost exactly the same on these figures, because the rates are deliberately aligned. The difference is who pays and whether it comes back. Section 455 is paid by the company and is refundable; dividend tax is paid by the director and is gone.
A dividend can only be declared if the company has sufficient distributable reserves. If it does not, declaring one does not solve the problem, it creates an unlawful dividend, which returns straight to the loan account.
The obvious workaround is to repay the balance just before the nine-month deadline and draw it out again afterwards. HMRC closed that in March 2013 with two anti-avoidance rules.
The 30-day rule: Where a director repays £5,000 or more and borrows £5,000 or more within 30 days, the repayment is disregarded to the extent it is matched by the new borrowing. Section 455 is charged on the lower of the amount repaid and the amount redrawn.
The arrangements rule: This bites even outside 30 days. Where the balance immediately before a repayment was at least £15,000, and at the time of repaying there was an intention or arrangement to redraw £5,000 or more, the repayment is matched against the new borrowing rather than the old debt. A 31-day gap does not help.
There is one important exception. The 30-day rule does not apply where the repayment is funded by a dividend, bonus or other payment that is itself taxable to the director. Clearing a loan account with a properly declared dividend is a genuine repayment, and redrawing afterwards does not reopen the old charge.
That exception is the reason the dividend route is the standard solution rather than a clever one.
Writing off or releasing the loan clears the balance, but it is rarely the cheap option people expect.
The director is taxed: A written-off loan to a participator is treated as a distribution and taxed on the director at dividend rates, so at 35.75% for an upper-rate taxpayer. HMRC also takes the view that Class 1 National Insurance can apply where the director is an employee.
The company gets no deduction: The write-off is disallowed for corporation tax purposes. The company bears the loss without relief against its profits.
The section 455 tax is released: On that side it is neutral, the company recovers what it paid.
So a write-off converts a company asset into a personal tax charge with no corporation tax relief. It is sometimes the right answer where the money genuinely cannot be repaid, but it should be a decision rather than a default.
Section 455 is a deposit rather than a permanent cost. It comes back once the loan is repaid, released or written off.
The timing is the painful part. Relief becomes available nine months and one day after the end of the accounting period in which the repayment happened, not when the repayment is made.
Work example: Your company has a 31 March year end. You repay the loan in June 2027, during the year ending 31 March 2028. The refund becomes available on 1 January 2029. The money sits with HMRC for around eighteen months.
The claim is made on form L2P, which asks for the accounting period in which the section 455 charge was paid, the date and amount of the repayment, and confirmation that the bed and breakfast rules are not engaged. Claims can generally be made up to four years from the end of the accounting period in which the loan was repaid.
One thing you do not get back: if the section 455 tax itself was paid late, HMRC’s interest on it is not refunded.
Not every director’s loan account is a problem. If you have put your own money into the company, paid company expenses personally, or left declared dividends undrawn, the account is in credit and the company owes you.
You can withdraw that money at any time with no tax charge at all, because it is your own capital being returned. For many directors this is the most tax-efficient money available to them, and it frequently goes unused simply because nobody has told them the balance is there.
You can also charge the company interest on a credit balance. The company deducts basic rate tax and accounts for it to HMRC, and you declare the interest on your tax return. Whether that is worthwhile depends on your personal position, but it is a legitimate option.
An overdrawn director’s loan account is an asset of the company. If the company becomes insolvent, a liquidator is obliged to pursue it.
Limited liability does not protect a director from a debt they personally owe the company. Overdrawn balances are routinely pursued in liquidation, and directors who assumed the company’s failure would wipe the slate clean find themselves personally liable for the full amount.
That is a strong argument for keeping the balance controlled while the business is healthy, rather than letting it grow on the basis that it can be dealt with later.
The director’s loan account is the single most common place where owner-managed companies pick up a tax charge nobody budgeted for. The pattern is almost always the same: drawings taken through the year with the intention of tidying them up later, a shortfall in distributable reserves that only becomes visible when the accounts are prepared, and a nine-month deadline that has been running since before anyone knew there was a problem.
None of it is difficult to manage. It requires knowing the balance before the year ends rather than months afterwards, checking there are reserves before declaring a dividend, and watching the £10,000 line across the whole tax year rather than at a single point. The expensive outcomes almost always come from finding out too late, not from the rules themselves.
At Aksons Accounting we track director’s loan account balances through the year rather than reporting them after the fact, and we flag the nine-month date before it becomes a problem rather than after. If your account is overdrawn and you are not sure which route out costs least, send us the balance and your year end and we will set out the options with the numbers attached.
Aksons Accounting provides accounting and tax support for individuals and businesses in the UK.
The firm aims to make accounting information easier to understand while helping clients manage their financial and tax responsibilities.
Alongside accounting services, Aksons Accounting provides practical online resources and tools, including its UK Sole Trader Tax Calculator and guidance relating to Making Tax Digital.
The calculator is designed as an estimation and planning tool, allowing users to explore how business income, expenses and other relevant factors may affect their tax position.
For specialist or complex circumstances, users should obtain advice based on their individual tax position.
Use our UK sole trader tax calculator to estimate 2026/27 Income Tax, National Insurance and student loan repayments for Self Assessment. to plan your tax.
Use our UK sole trader tax calculator to estimate 2026/27 Income Tax, National Insurance and student loan repayments for Self Assessment. to plan your tax.
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