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A director loan account records all money flows between a director and their company that are not salary, dividends or expense reimbursement. When overdrawn and not repaid within nine months of the company year end HMRC charges S455 tax at 33.75% — one of the most common unexpected tax bills facing limited company directors.
S455 tax on overdrawn DLA
33.75%
Payable 9 months after year end
Beneficial loan exemption threshold
£10,000
Interest-free loans below this exempt
Window to repay before S455 applies
9 months
From company accounting year end
Why this matters in 2026
With corporation tax at 25% and dividend tax rates elevated many directors draw informally from their companies through loan accounts. HMRC has significantly increased scrutiny of DLAs and the S455 charge is routinely missed by directors who only discover the problem when year-end accounts are prepared months later.
In this report
01
What is a director loan account
A DLA records every transaction between a director and their company that is not salary, dividends or expense reimbursement. Cash drawings, personal expenses paid by the company and company card personal purchases all log in the DLA. Director payments into the company are also recorded.
A DLA in credit means the company owes the director. Overdrawn means the director owes the company. An overdrawn DLA not repaid within nine months of year end triggers the S455 charge. Most directors who face this bill discover the problem too late to act.
Key insight
Monthly management accounts showing the DLA balance are the single most effective way to avoid unexpected S455 charges. Most directors who face S455 bills discover the problem too late to act.
02
The S455 tax charge explained
S455 of the Corporation Tax Act 2010 charges 33.75% on the outstanding overdrawn DLA balance nine months and one day after the company accounting year end. This is paid alongside the corporation tax liability for that year.
S455 is refundable when the loan is repaid — but the refund is only available nine months after the end of the accounting period in which repayment occurred. A £50,000 overdrawn DLA triggers £16,875. If repaid the next day the refund may not arrive for up to 21 months creating a significant cash flow burden.
Key insight
A £50,000 overdrawn DLA not repaid within nine months triggers £16,875 in S455 tax. Even if repaid immediately the refund takes up to 21 months to recover from HMRC.
Important
HMRC has anti-avoidance rules targeting bed-and-breakfasting where directors repay just before the deadline then immediately redraw. A 30-day rule applies to prevent this.
03
Beneficial loan rules
If a director borrows from the company and pays no interest or below the HMRC official rate a taxable benefit in kind arises. The official rate for 2026/27 is 2.25%. Loans of £10,000 or less are exempt.
Above £10,000 the director pays income tax on the interest saving at the official rate minus any interest paid. The company pays Class 1A NIC at 13.8% on the same benefit. Charging interest at the official rate on any loan above £10,000 eliminates the benefit in kind entirely.
Key insight
On a £50,000 interest-free director loan the annual benefit in kind is £1,125. A 40% taxpayer pays £450 in income tax and the company pays £155 in Class 1A NIC — both avoidable by charging 2.25% interest.
Important
The beneficial loan benefit in kind and the S455 charge are separate. Both can apply simultaneously to the same overdrawn DLA balance.
04
How to clear an overdrawn DLA
The most efficient way to clear an overdrawn DLA is to declare a dividend and offset it against the balance — provided the company has sufficient distributable reserves. This avoids PAYE and NIC on the clearing amount.
Alternatively the director can repay in cash before the nine-month deadline. A bonus offset against the DLA is also possible but is subject to PAYE income tax and NIC making it significantly less tax-efficient than a dividend approach. Writing off the DLA is the least efficient option — the written-off amount is treated as income.
Key insight
Declaring a dividend to clear an overdrawn DLA before the nine-month deadline avoids S455 entirely. Ensure sufficient distributable reserves exist before the dividend is declared.
Important
A dividend declared when there are insufficient distributable reserves is an unlawful distribution. Take accountant advice before using this approach.
05
Record keeping and prevention
The key to avoiding DLA problems is maintaining clear records throughout the year. Every personal expense paid by the company, every cash withdrawal and every personal purchase on a company card should be logged in the DLA immediately.
Monthly management accounts should always include the DLA balance. If it is increasing the director can take corrective action during the year — through salary adjustments, dividend declarations or cash repayments — rather than facing a large unexpected bill months after year end.
Key insight
Directors who monitor their DLA balance monthly and plan dividends proactively never face unexpected S455 charges. The problem is entirely administrative and entirely preventable.
Action checklist
- Ask your accountant for the current DLA balance immediately if you do not know it
- Calculate the nine-month repayment deadline from your last company year end
- If overdrawn assess whether a dividend or cash repayment is most tax-efficient
- Ensure sufficient distributable reserves exist before declaring a dividend to clear the DLA
- Set up monthly management accounts with the DLA balance as a standard line item
- Avoid bed-and-breakfasting repayments near the nine-month deadline
- Consider charging 2.25% interest on any loan above £10,000 to eliminate the benefit in kind
Sources
- Corporation Tax Act 2010 section 455
- HMRC Director loan accounts CTM61500: gov.uk/hmrc-internal-manuals/company-taxation-manual
- HMRC Beneficial loans EIM26100: gov.uk/hmrc-internal-manuals/employment-income-manual
- Income Tax (Earnings and Pensions) Act 2003 sections 173-191
- HMRC Class 1A NIC on benefits: gov.uk/employer-reporting-expenses-benefits
Disclaimer: For information only. Not financial, tax or legal advice. Consult a qualified adviser before making decisions. Figures correct April 2026.
Further reading
Business
VAT Flat Rate Scheme UK 2026: Is It Still Worth It? Full Cost-Benefit Analysis
Tax & HMRC
The 60% Income Tax Trap UK 2026: How to Escape the Personal Allowance Withdrawal Zone
Mortgages
Self-Employed Mortgage UK 2026: How to Get Approved With 1 or 2 Years Accounts
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