If you run your own limited company, there is a good chance you have a director’s loan account, even if you have never heard the phrase before. It is one of the most misunderstood parts of running a company, and it is also one of the most common sources of unexpected tax bills.
The good news is that once you understand how it works, it is very easy to keep under control. This post explains what a director’s loan account is, when it becomes a problem and what you can do to stay on the right side of the rules.
What is a director’s loan account?
A limited company is a separate legal person. The money in the business bank account belongs to the company, not to you, even if you own every single share.
That means every pound you take out of the company needs to be recorded as something. Usually that is one of the following:
Salary, paid through payroll.
Dividends, paid out of profits after Corporation Tax.
Repayment of business expenses you have paid for personally.
If money leaves the company and it is none of those, it is treated as a loan to you. Your director’s loan account is simply the running record of those loans, together with any money you have lent to the company.
If you have taken out more than you have put in, the account is overdrawn and you owe the company money. If you have put in more than you have taken out, the account is in credit and the company owes you.
How it usually builds up
Very few directors set out to borrow from their company. An overdrawn loan account usually happens gradually.
A personal purchase goes on the business card. A transfer is made to cover a household bill. Dividends are taken during the year without anyone checking that there are enough profits to support them. By the time the year end accounts are prepared, the director owes the company a surprisingly large amount.
None of this is illegal in itself. Directors are allowed to borrow from their company. The problems come from the tax rules that apply if the balance is not dealt with in time.
The nine month rule and the Section 455 charge
If your loan account is still overdrawn nine months and one day after the end of the company’s accounting period, the company has to pay an additional tax charge on the outstanding balance. This is known as the Section 455 charge.
For loans made on or after 6 April 2026, the rate is 35.75 percent. Loans made before that date are charged at the previous rate of 33.75 percent. To put that in perspective, an overdrawn balance of £20,000 left outstanding past the deadline could mean an extra £7,150 of tax for the company to pay.
The charge is not a permanent cost. Once the loan is repaid, the company can reclaim it. However, the refund is not immediate. HMRC repays it nine months and one day after the end of the accounting period in which the loan was cleared, so the money can be tied up for a long time. For a small business, that is a real cash flow hit.
Loans over £10,000
There is a second rule to be aware of. If your loan account is overdrawn by more than £10,000 at any point in the tax year, and you are not paying the company interest at HMRC’s official rate, the interest you have saved is treated as a benefit in kind.
That means it needs to be reported to HMRC, you pay Income Tax on the benefit and the company pays Class 1A National Insurance on it. The official rate for 2026/27 is currently 3.75 percent. Paying the company interest at or above that rate removes the benefit in kind.
The “bed and breakfasting” trap
Some directors try to get around the rules by repaying the loan just before the deadline and then taking the money straight back out again. HMRC is well aware of this.
If you repay £5,000 or more and then borrow a similar amount again within 30 days, the repayment can be ignored and the Section 455 charge applies as if the loan had never been cleared. There are also wider rules for larger balances where there is an arrangement to borrow again. In short, a quick in and out repayment does not work.
How to clear an overdrawn loan account
There are three main ways to bring an overdrawn account back to zero.
Repay it personally. Transferring your own money back into the company is the simplest option and has no further tax consequences.
Declare a dividend. If the company has enough retained profits, a dividend can be credited to your loan account to clear the balance. You will pay dividend tax on it personally, so it is worth checking the numbers first.
Pay a bonus or additional salary. This clears the balance too, but it goes through payroll and attracts Income Tax and National Insurance, so it is often the most expensive route.
The right answer depends on your company’s profits, your other income and the timing of your year end. This is exactly the sort of decision that is worth making with your accountant before the deadline, not after it.
When a loan account in credit is useful
It is not all bad news. If your loan account is in credit, perhaps because you lent the company money when you set it up, the company can repay you that money at any time without any tax to pay. It is simply the company returning your own money.
Some directors also choose to charge the company interest on money they have lent it. That interest can be a deductible cost for the company, although it is taxable income for you, so again it is worth taking advice.
Simple habits that keep you out of trouble
Keep personal spending off the business card wherever possible.
Pay yourself properly through a planned mix of salary and dividends, rather than dipping into the account as and when.
Check your loan account balance regularly during the year, not just at year end.
Make sure dividends are properly declared and supported by available profits.
Talk to your accountant well before your nine month deadline if the account is overdrawn.
How Solutions Accountancy can help
A director’s loan account is one of those areas where a quick conversation during the year can save a great deal of money and stress later on. At Solutions Accountancy, we keep an eye on our clients’ loan account balances, help plan tax efficient ways to take money out of the business and make sure nothing is left to chance at year end.
If you are not sure where your own director’s loan account stands, or you would like help planning how you pay yourself, get in touch with the team for a friendly chat.