Part of our complete guide to salary & dividends.
What a director's loan account actually is
A director's loan account (DLA) tracks any money moving between a director and their company that isn't salary, dividends, or a reimbursed business expense. If you take money out of the company that isn't formally one of those, you've borrowed from the company, and your DLA is "overdrawn." Many directors drift into this without realising, taking a bit extra for personal use mid-year, intending to formalise it as a dividend later.
The Section 455 charge
If an overdrawn director's loan is still outstanding 9 months after the end of the company's accounting period, the company must pay a corporation tax charge, Section 455 tax, at 33.75% of the outstanding balance.
Verify before relying on this: the 33.75% rate and 9-month trigger are general knowledge in this article, not freshly re-confirmed against gov.uk at the time of writing. Check your specific figures with us.
Why it's recoverable, but still costly
Once the loan is actually repaid, the company can reclaim the Section 455 tax from HMRC. But this isn't instant, there's a real cash-flow cost in the gap between paying it and getting it back, which is why avoiding the charge entirely, by repaying the loan within the 9-month window, is almost always better than relying on the refund mechanism.
The separate benefit-in-kind risk
There's a second, distinct issue if the loan exceeds £10,000 at any point during the tax year: unless interest is charged at HMRC's official rate, the loan is treated as a taxable benefit-in-kind on the director personally, reportable on a P11D, see our note on P11D deadlines. This is separate from, and in addition to, the company's Section 455 exposure.
How to avoid the problem
- Formalise withdrawals properly as salary or dividends at the time, rather than letting them sit as an informal loan
- If a genuine loan is needed, repay it before the 9-month post-year-end deadline
- Keep the balance under £10,000, or charge interest at HMRC's official rate, to avoid the benefit-in-kind issue
- Don't immediately re-borrow after repaying, HMRC has specific anti-avoidance rules ("bed and breakfasting") targeting loans repaid just before the deadline and then taken out again shortly after
Think your DLA might be overdrawn? Book a free consultation before your accounting period's 9-month deadline, there's usually more that can be done to avoid the charge before it's triggered than after.
Frequently asked questions
What is a director's loan account?
A record of money a director has borrowed from, or lent to, their own company, outside of salary, dividends or expenses. If it's overdrawn, the director owes the company money.
What is the Section 455 charge?
A 33.75% corporation tax charge on any part of a director's loan that remains outstanding 9 months after the company's accounting period ends, intended to discourage directors from using the company as an interest-free bank.
Can I get the Section 455 tax back?
Yes, once the loan is repaid, the company can reclaim the Section 455 tax from HMRC, but this can take time and creates a cash-flow gap in the meantime, repaying before the 9-month deadline avoids the charge entirely.
Is there a benefit-in-kind charge too?
Yes, if the loan exceeds £10,000 at any point and isn't charged interest at HMRC's official rate, it's treated as a taxable benefit-in-kind on the director personally, separate from the company's Section 455 charge.