Borrowing from your own company seems harmless. But leave an overdrawn balance too long and HMRC charges your company 33.75% tax on the outstanding amount. This guide explains exactly when that happens and how to avoid it.
Quick Summary: Director's Loan Account Basics
What Is a Director's Loan Account?
Your director's loan account is a running record of money moving between you personally and your limited company. It's not a separate bank account. It's a ledger entry in your company's books.
DLA In Credit (Good)
You've put money into the company:
- Personal funds transferred in
- Expenses paid personally for the company
- Undeclared dividends owed to you
DLA Overdrawn (Problem)
You've taken money out:
- Transfers to personal account without dividend
- Company card for personal expenses
- Personal bills paid from company account
Why HMRC Cares
Salary and dividends are taxed as income. Director's loans are not. Without Section 455, you could extract unlimited cash from your company tax-free by calling it a "loan" you never repay. That's why the rules exist.
When Your DLA Becomes a Tax Problem
An overdrawn DLA only triggers tax in specific circumstances. Here's the timeline that matters.
Step 1: Year End
Your company's accounting year ends. HMRC notes your DLA balance.
Step 2: 9-Month Window
You have 9 months to clear the balance. March year end = December deadline.
Step 3: Section 455 Triggered
Still outstanding? Company pays 33.75% tax on what you owe.
| If Year End Is | Clear DLA By | Or S455 Tax Due |
|---|---|---|
| 31 March 2025 | 31 December 2025 | 1 January 2026 |
| 30 June 2025 | 31 March 2026 | 1 April 2026 |
| 31 December 2025 | 30 September 2026 | 1 October 2026 |
The Section 455 Tax Charge: Real Numbers
Section 455 of the Corporation Tax Act 2010 requires your company to pay tax on loans to participators (which includes you, the director). The rate matches the higher rate of dividend tax: 33.75% for 2025/26.
Section 455 Tax Example
Director owes £20,000 at year end, still unpaid 9 months later.
The Refund Process
Good news: Section 455 tax is refundable when you repay the loan. Bad news: HMRC keeps the money for 9 months after you repay. If you borrow £20,000, your company could be out of pocket by £6,750 for 18+ months. That's working capital you cannot use.
Benefit-in-Kind: The £10,000 Threshold
If your director's loan exceeds £10,000 at any point during the tax year, you must pay personal tax on the notional interest.
Benefit-in-Kind Example
Director borrows £15,000 for the full tax year. Official rate: 2.25%.
Reported on your P11D. Small amounts, but adds administrative burden.
Four Ways to Clear an Overdrawn DLA
The simplest solution is to clear your DLA before it becomes a problem. Here are your options, ranked by tax efficiency.
Declare Dividends
If your company has sufficient retained profits, vote a dividend to yourself. This clears the loan and is taxed as dividend income. Usually the cheapest option.
Repay From Personal Funds
Transfer money from your personal savings to the company. This genuinely clears the debt. Document it properly with bank statements.
Offset Credit Balance
If you've lent money to the company in the past (credit balance on your DLA), you can offset this against what you owe. Check with your accountant first.
Vote a Bonus (Expensive)
You can take a salary bonus that clears the loan. This is taxed as employment income with PAYE and National Insurance. Usually the most expensive option. Avoid if possible.
The 30-Day Rule: Don't Get Caught
HMRC anticipated that directors might repay loans just before the deadline, then borrow the money again immediately. So they created the 30-day rule.
The 30-Day Trap
If you repay a loan and then borrow £5,000 or more within 30 days, the repayment doesn't count. HMRC treats the loan as if it was never repaid.
Example: Director repays £15,000 in December. Needs cash in January, borrows £8,000. HMRC says the December repayment doesn't count.
Simple Fix
If you need to borrow again, wait 31 days. Or plan your cash flow so you don't need to borrow back immediately.
Your DLA Record-Keeping Checklist
Proper documentation protects you if HMRC ever queries your DLA. Here's what to keep.
For Each Loan or Advance
- Date of the transaction
- Amount borrowed
- Purpose (if relevant)
- Board minute authorising the loan
For Repayments
- Date of repayment
- Amount repaid
- Method (bank transfer, dividend offset, bonus)
- Bank statement showing the transfer
Frequently Asked Questions
What triggers Section 455 tax?
Section 455 is triggered when a director's loan remains outstanding 9 months after the company's year end. If you repay before this deadline, no Section 455 tax is due.
Is Section 455 tax refundable?
Yes. When you repay the loan, HMRC refunds the Section 455 tax to your company. However, you have to wait 9 months after repayment to receive the refund.
Can I offset dividends against my DLA?
Yes. Declaring a dividend to yourself is one of the most tax-efficient ways to clear an overdrawn DLA. The dividend is credited to your DLA, reducing or clearing the balance.
What is the benefit-in-kind threshold?
If your loan exceeds £10,000 at any point during the tax year and you don't pay interest at the official rate (currently 2.25%), you'll have a taxable benefit-in-kind.
Related Guides
Our Director Salary Calculator helps you find the optimal salary and dividend mix. Getting this right reduces the need to borrow from your company in the first place.
If you're thinking about pensions as an alternative to dividends, read our guide on dividend tax changes coming in April 2026.
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