What is a director's loan account, and what happens when it goes overdrawn?

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by Abbas Gulamhusein

Take money out of your company that isn't salary, a dividend or a genuine expense, and it lands in your director's loan account. Leave that account overdrawn and it triggers tax charges that catch a lot of owner-directors by surprise. From April 2026 the main charge is bigger than it used to be.

Most owner-directors don't set out to borrow from their own company. It happens gradually. You need cash, you take it from the business account, your accountant records it, and over a few years the balance quietly builds. That running record is your director's loan account, and once it tips into overdrawn territory it stops being an accounting footnote and starts costing you real money.

What a director's loan account actually is

A director's loan account, or DLA, tracks everything that moves between you and your company that isn't salary, dividend, an expense reimbursement or a genuine business cost. Put your own money in, say to fund early trading, and the account sits in credit; the company owes you. Take money out for personal use without declaring it as salary or a dividend, and the account goes overdrawn; now you owe the company.

In a tidy business the DLA spends most of its life at or near zero. Pay is run formally, dividends are declared properly, expenses go through the books, and the loan account is kept for short-term borrowing or the odd capital movement. The trouble starts when it becomes a de facto overdraft, the place where ad-hoc cash withdrawals end up, year after year.

The section 455 charge, and why it went up in April 2026

The big one is section 455 tax, named after section 455 of the Corporation Tax Act 2010. If your DLA is still overdrawn nine months and one day after your company's year end, the company has to pay HMRC tax on the outstanding balance.

For loans made on or after 6 April 2026 the rate is 35.75%. That follows the two-point rise in the dividend upper rate announced in the November 2025 Budget, because the section 455 rate is pegged to that rate. Loans you took before 6 April 2026 stay on the old 33.75% rate. The increase does not sweep up your existing borrowing automatically.

The numbers add up quickly. A £100,000 balance made up of new borrowing produces a section 455 bill of £35,750. £200,000 gives you £71,500. £500,000 gives you £178,750. That is the company's money, not yours, and it has to find it before the deadline.

There is one wrinkle worth knowing if your balance straddles the rate change. Where part of your borrowing predates April 2026 and part comes after, and you start repaying, HMRC's default is to treat the oldest and cheaper borrowing as repaid first, leaving the expensive 35.75% slice sitting there. You can override that with a short board minute or email recording that repayments are to be set against the post-April 2026 loans first. On a mixed-rate balance that is worth doing.

The good news is that section 455 is temporary. Repay the loan and the company reclaims the tax, though there is a wait; the refund can't be claimed until nine months and one day after the end of the accounting period in which you repaid. So it is best thought of as a cashflow tax rather than a permanent cost. But it is a cashflow tax that can tie up six figures for well over a year.

The benefit-in-kind charge

Section 455 isn't the only issue. If your loan exceeds £10,000 at any point in the tax year, you also have a benefit-in-kind. HMRC treats an interest-free or cheap loan from your company as a perk and taxes you on the interest you didn't pay, worked out using its official rate.

That rate is 3.75% for 2026/27, the same as last year, although HMRC now reviews it quarterly so it can move during the year. On a £100,000 loan that is £3,750 of deemed income; as a higher-rate taxpayer it costs you around £1,500. On £500,000 it is £18,750 of deemed income, costing roughly £7,500.

Unlike section 455, this charge is personal. It is your income tax, reported on a P11D, and the company also pays Class 1A National Insurance on the benefit. The two charges run independently, so you can clear the loan inside nine months and avoid section 455 while still picking up a benefit-in-kind for the months the balance sat above £10,000.

Clearing an overdrawn account

There are really only three ways out. Declare a dividend, if the company has the retained profits to support it, and set it against the balance. Vote yourself extra salary or a bonus, which runs through PAYE and National Insurance and reduces the loan. Or pay cash back into the company from your own funds.

For most owner-directors a formal dividend is the cleanest route, assuming the profits are there. Declare it properly, minute it, and credit it to the loan account. Cash is tidier still if you have it personally. Salary tends to be the least efficient because of the National Insurance, though it has its place depending on your wider remuneration position.

One thing you can't do is repay the loan just before the deadline and pull the same money straight back out. HMRC's anti-avoidance rules are built for exactly that. If you repay £5,000 or more and take new borrowing of £5,000 or more within 30 days, the repayment is ignored. There is a second, broader rule for larger balances with no 30-day safe harbour at all, so engineered round-trips are a bad idea. These rules look at what actually happened, not the dates on the bank statement.

Why it matters at scale

The reason this catches people is that the balance creeps. A director drawing irregular cash against the account over a few years can look up to find £150,000 or £200,000 sitting overdrawn without ever having made a conscious decision to borrow it. At that point the section 455 charge, the benefit-in-kind and the cashflow hit all land together, and clearing the balance becomes a genuine problem for the business rather than a tidy-up.

Managing it

The fix isn't complicated, it is just discipline. Know your loan account balance. If it is overdrawn, have a plan to clear it before the nine-month deadline rather than treating it as a permanent overdraft. Keep the withdrawals deliberate and recorded. And if you genuinely don't know where the balance sits, find out, because the version of this problem that hurts is the one discovered after the year end has passed and the deadline is bearing down.

If you'd like us to review your loan account position and work out the cleanest way to clear it, get in touch with us at Saymur.