Director's Loan Accounts Explained: Rules, Tax and the Overdrawn Trap
A director's loan account (DLA) records money you owe the company, or it owes you, outside of salary, dividends and expenses. Used well it's a flexible tool; left overdrawn it triggers some of the nastiest charges in the tax code — and the main one just went up.
Headline: S455 now tracks the higher dividend rate
New director's loans made on or after 6 April 2026 face a Section 455 charge of 35.75%. Loans made before that date remain at 33.75%. Both are repayable by HMRC after the loan is cleared, but the cash-flow hit is real.
What is a director's loan account?
A DLA is a running ledger between the director and the company. It can be in credit — meaning the company owes you money, perhaps because you funded startup costs personally or paid for expenses on behalf of the company. Or it can be overdrawn — meaning you've taken money out of the company that isn't covered by salary, dividends or properly reimbursed expenses.
It is the overdrawn balance that matters for tax. HMRC treats an overdrawn DLA as a loan from the company to the director, and applies special rules designed to stop owner-directors extracting money from their companies without paying tax.
The Section 455 charge
If the DLA is still overdrawn 9 months and 1 day after the company's accounting year end, the company pays Section 455 (S455) tax on the outstanding balance. The rate depends on when the loan was made:
| Loan date | S455 rate |
|---|---|
| Made on or after 6 April 2026 | 35.75% |
| Made before 6 April 2026 | 33.75% |
The rate tracks the dividend upper rate, which rose 2 percentage points at the Autumn Budget 2025. Crucially, S455 is a deposit, not a final tax: HMRC refunds it after the loan is repaid or written off — but only 9 months and 1 day after the end of the accounting period in which repayment happens. So the cash-flow cost is real, even if the net tax position eventually unwinds.
The benefit-in-kind trap over £10,000
If the loan exceeds £10,000 at any point in the tax year and you pay the company no interest (or interest below HMRC's official rate), it becomes a taxable benefit. You pay income tax on the notional interest at the official rate, and the company pays Class 1A National Insurance.
HMRC's official rate was 3.75% for 2025/26 and is currently reviewed quarterly. You can avoid the benefit-in-kind charge by either:
- Paying interest at the official rate to the company.
- Keeping the balance at £10,000 or below throughout the tax year.
Bed and breakfasting: the 30-day rule
Repaying the loan just before the year end and then redrawing it shortly afterwards does not defeat the S455 charge. Repayments of £5,000 or more that are re-borrowed within 30 days are matched to the original borrowing, so the S455 charge still applies.
There is also a wider anti-avoidance rule for arrangements involving balances over £15,000. If a repayment-and-redraw was always intended, HMRC can treat it as if the loan was never really repaid.
Writing off a director's loan
Writing off an overdrawn loan is generally the most expensive exit. The written-off amount is taxed on the director like a dividend, using the 2026/27 dividend rates of 10.75%, 35.75% or 39.35%. HMRC usually also expects Class 1 National Insurance to be paid through payroll on the amount written off.
For that reason, repaying via a properly declared dividend or bonus is usually better — and a cash repayment is best of all, because it unlocks the S455 refund in due course.
Loan, salary or dividend?
A short-term loan that is repaid within 9 months and kept at or below £10,000 is genuinely tax-free. It can be the cheapest way to bridge a temporary personal cash need, such as a house deposit or a tax payment.
For permanent extraction, loans usually lose. Salary and dividends have known tax costs up front; an overdrawn DLA has hidden costs that can snowball. Compare the two main routes in our salary vs dividends 2026/27 guide, or use the homepage calculator to model your own numbers.
The position is reversed when you lend money to the company. You can charge the company interest on the loan, which is deductible for corporation tax. The company pays the interest gross via CT61 with 20% tax withheld at source.