Director's loan account explained: overdrawn balances, s455 and benefit in kind.

What a director's loan is

GOV.UK describes a director's loan as money you, or a close family member, get from your company that is not one of the following:

• A salary, dividend or expense repayment
• Money you have previously paid into the company or lent to it

So if you pay a personal bill from the business account, or move £2,000 to your own account "until the dividend is sorted", that is a director's loan. It is not a cost of the business and it is not income yet. It is a debt you owe the company.

The same works in reverse. If you pay a company bill with your own card, or put your savings into the company to get it started, the company owes you that money. Our page on bookkeeping for startups covers recording these early payments.

What the director's loan account is

You must keep a record of any money you borrow from the company or pay into it. That record is the director's loan account. In the bookkeeping software it is usually a balance sheet account, often one per director, and every movement between you and the company goes through it.

At any point, the account is in one of two states:

• In credit. The company owes you money.
• Overdrawn. You owe the company money.

At the end of the financial year, the balance goes on the balance sheet in the annual accounts. If you are new to reading one, our guide on how to read a balance sheet shows where it sits.

What typically goes through it

In practice, these are the entries that build up the balance:

• Personal spending on the company card or from the company bank account
• Transfers from the company account to your personal account
• Company costs you paid personally and have not yet been repaid
• Money you introduce to the company
• Dividends or salary credited to the account rather than paid out in cash

When the company owes you

A loan account in credit is the simpler position. The company does not pay Corporation Tax on money you lend it, and you can usually take that money back without any tax to pay on the repayment itself.

If you charge the company interest on your loan, the rules change. The interest is a business expense for the company and personal income for you, which you report on your Self Assessment return. The company pays you the interest less Income Tax at the 20% basic rate. It then reports and pays that tax to HMRC quarterly on form CT61.

When you owe the company: the overdrawn account

An overdrawn account is where the tax costs begin. What happens depends on whether the balance is cleared, and when.

Repaid within 9 months of the year end

If you repay the loan within 9 months of the end of the company's Corporation Tax accounting period, you have no personal responsibilities. The company still shows the amount owed at the period end on form CT600A, which goes with the Company Tax Return.

Not repaid within 9 months: the s455 charge

If the balance is still outstanding 9 months after the period end, the company pays extra Corporation Tax on it. This is often called s455 tax, after the section of the Corporation Tax Act 2010 that creates it. The rate on the outstanding amount is 35.75% for loans made on or after 6 April 2026, 33.75% for loans made from 6 April 2022 to 5 April 2026, and 32.5% for loans made before 6 April 2022.

The timing lines up with the normal Corporation Tax deadline. Most companies must pay their Corporation Tax 9 months and 1 day after the end of the accounting period. Interest is charged on the s455 tax from then until it is paid or the loan is repaid.

The s455 tax is not lost for ever. Once the loan is repaid, written off or released, the company can reclaim it. It cannot reclaim the interest.

Why bed and breakfasting does not work

Some directors try to clear the balance just before the deadline, then take the money straight back out. The rules anticipate this. The s455 charge still applies to the original loan if:

• The loan was over £5,000 and you took another loan of £5,000 or more within 30 days before or after repaying it
• The loan was over £15,000 and, when you repaid it, you had arranged to take another loan

A genuine repayment, from salary, a dividend or your own savings, is what clears the position.

Getting the s455 tax back

HMRC will not repay the s455 tax straight away. The relief becomes due 9 months and 1 day after the end of the accounting period in which the loan was repaid, written off or released.

The claim must be made within 4 years. If it is within 2 years of the end of the accounting period when the loan was taken out, it goes on form CT600A with a Company Tax Return. After 2 years, the company uses form L2P.

So s455 tax is a cash flow cost rather than a permanent one, provided the loan is eventually repaid.

Loans over £10,000: benefit in kind

A second set of rules looks at the size of the loan during the tax year.

If you are a shareholder as well as a director, and you owed the company more than £10,000 at any point in the tax year, the loan is treated as a benefit in kind. The cheap or free borrowing is a perk of the job, and it is taxed like one.

• The company must treat the loan as a benefit in kind and deduct Class 1 National Insurance.
• You report the loan on your Self Assessment return and may owe tax at the official rate of interest.

GOV.UK's guidance for employers on beneficial loans also says the loan is reported on form P11D, with Class 1A National Insurance paid on the value of the benefit. Ask your accountant which applies to your company.

GOV.UK says a loan is exempt from this if the combined outstanding value to an employee is less than £10,000 throughout the whole tax year. A director's loan account that is never overdrawn during the tax year is also exempt.

Charging some interest does not always solve it. If you pay interest below HMRC's official rate, the gap between the two is still treated as a benefit in kind.

If the loan is written off

Sometimes a company decides not to collect the money at all. If the loan is written off or released, including when the company goes into liquidation, it does not simply disappear:

• The company deducts Class 1 National Insurance through payroll
• You pay Income Tax on the loan through your Self Assessment tax return

The company can then reclaim any s455 tax it paid on that loan, in the same way as for a repayment.

How to keep the account under control

Most overdrawn loan accounts are not planned. Personal and business spending get mixed, and nobody notices until year end. A few habits help:

• Keep personal spending off the company card. Where it happens by mistake, record it on the loan account straight away.
• Pay yourself on purpose. Decide how you will take money out. Our guides on director salary and dividend tax rates cover the main routes.
• Know the difference between an expense and a loan. A genuine business cost paid personally reduces what you owe. A personal one increases it. Our guide to allowable expenses for limited companies helps here.
• Check the balance during the year. The £10,000 test applies at any point in the tax year, so a year-end check alone can miss it.
• Plan repayment before the 9 months are up. If you will clear the balance with a dividend, the company needs enough distributable profit to pay it.

Why up-to-date bookkeeping matters here

The director's loan account is only as accurate as the bank reconciliation behind it. If bank lines are coded weeks after the event, a personal purchase can sit in a suspense account or be coded as a business cost. Either way, the true loan balance is hidden.

When books are kept current, each personal payment is spotted and posted to the loan account within a day or two. You can see the running balance whenever you like, which makes the £10,000 point and the 9 month deadline much easier to manage.

For more on how this fits with the rest of the company's records, see our page on bookkeeping for limited companies, or our guide to paying your Corporation Tax bill.