Overdrawn director’s loan account: tax traps and how to fix them

Many directors – particularly of owner-managed businesses – succumb to the temptation to use the company bank account like a personal wallet. It may seem harmless to make a quick transfer here, or pay a personal bill there. But when your accountant tells you that you have an overdrawn director’s loan account (DLA), you may be facing an expensive problem.

The fact is that, if you (or another director) take cash out of your company and it’s not salary, dividends or a reimbursed business expense, it’s normally treated as a director’s loan.

Unfortunately, if that loan is still outstanding 9 months and 1 day after your company year-end, your company can get hit with a 33.75% Section 455 (S455) corporation tax charge.

In this guide, we explain how to manage an overdrawn director’s loan account and the most tax-efficient ways to clear it – before HMRC (and avoidable tax bills) step in.

What is an overdrawn director’s loan account?

A director’s loan account (DLA) is simply the running balance of money you owe the company (or the company owes you). It becomes an overdrawn director’s loan account when you owe the company money – in other words, the balance is negative.

This can happen for perfectly ordinary reasons, for example:

• A temporary cashflow pinch personally (you “borrow” some money from the company with the intention of repaying it soon).
• An accidental over-withdrawal because dividends weren’t properly declared.
• Personal spending on a company card that wasn’t reimbursed promptly.

This matters because an overdrawn DLA can trigger company tax charges, personal tax charges, and extra reporting.

Tip: Keeping accurate records is vital. If you use cloud accounting software, it can track your DLA in real-time so you never get a nasty surprise.

The S455 Tax Sting

If your company is a “close company” and it makes a loan to a participator (often a shareholder-director), and that loan is still outstanding 9 months and 1 day after the end of the accounting period, the company must pay the S455 corporation tax charge.

Note, however, that Section 455 does not apply in every scenario. For example, certain loans of £15,000 or less to full?time employee/directors who do not have a material interest can be excluded.

S455 is charged at the dividend upper rate for the tax year in which the loan is made (or benefit conferred).

• Current rate. For loans made now, the rate is 33.75%.
• Future warning. From 6th April 2026, the higher dividend rate is expected to rise to 35.75%. Loans made on or after that date will likely attract this higher charge.

S455 is refundable once the loan is repaid, written off, or released – but HMRC won’t repay it immediately. Relief is only due 9 months and 1 day after the end of the accounting period in which the repayment happens. This means that, in practice, HMRC can hold onto your cash for quite a while.

Tip: Calculating S455 tax (and reclaiming it correctly) is part of our Annual Accounts Service. We can help make sure refundable tax is claimed as soon as the rules allow.

Hidden Cost: Benefit in Kind (P11D)

Even if you avoid S455 (by repaying in time), there’s another common trap.

If, at any point in the tax year, the aggregate balance on all beneficial loans you have from the company exceeds £10,000, HMRC treats it as a beneficial loan (a Benefit in Kind).

What this means in practice:

1. You (personally) are taxed on the “saved interest” (the difference between what you paid and HMRC’s official rate).
2. The company pays Class 1A National Insurance on the benefit. As per HMRC’s rates for the 2025/26 tax year, the Class 1A rate has increased to 15%.

The “saved interest” is calculated using HMRC’s official rate. Note that this rate increased to 3.75% from 6 April 2025.

If you pay interest to the company at at least HMRC’s official rate, there’s usually no beneficial loan benefit to report.

Tip: We handle P11D compliance as part of our outsourced payroll service so that you stay compliant.

How to clear an overdrawn director’s loan account

There isn’t one “best” solution for clearing an overdrawn director’s loan account. How you do it depends on profits, cashflow, other income, and timing.

Option A: Repay the cash. The cleanest route is a straightforward repayment from you back to the company.

• Pros: Simple, no extra payroll / dividend paperwork.
• Cons: You need to have the cash available personally.

Option B: Declare a dividend. If the company has sufficient distributable reserves, it may declare a dividend and credit it against your loan account (rather than paying cash out).

• Warning: You must have adequate distributable reserves and follow proper company procedures.

Option C: Bonus / Salary. It’s possible to settle a director’s loan by putting an additional amount through payroll (salary or bonus). You can then use the net pay to repay the loan.

• Warning: This can trigger Income Tax and National Insurance costs.

Tip: Unsure which route is cheapest overall? One of our accountants can explain the scenarios for you and help you choose the most tax-efficient approach.

Watch out for “Bed and Breakfasting”

HMRC is wise to the trick of people “repaying” a director’s loan just before the deadline, only to take the money back out shortly after.

To stop this, they use “matching” rules. If these rules apply, HMRC effectively matches your repayment against the new loan, leaving the old loan unpaid (and still subject to S455 at the relevant rate).

1. The 30-Day Rule. This applies if, within a 30-day period (typically around or after the year-end), you make repayments of £5,000 or more and then withdraw new loans of £5,000 or more.
2. The Arrangements Rule (for larger loans). Even if you wait more than 30 days, you can still be caught. This applies if your outstanding loan is £15,000 or more and there are arrangements in place to borrow £5,000 or more again at the time of repayment.

Put simply, you cannot simply cycle cash through the company to avoid the tax. The repayment must be genuine.

Key dates & deadlines

If you are worried about deadlines, this quick reference guide will help you.

1. If your aggregate loan balance was over £10,000

If your aggregate DLA balance exceeded £10,000 at any point in the tax year (6 April to 5 April), it is a reportable Benefit in Kind.

• By 6th July: File P11D and P11D(b) forms.
• By 22nd July: Pay Class 1A National Insurance to HMRC (19th July if paying by cheque).

2. Quick Calculator: When is S455 tax due?

S455 applies if the loan is still outstanding 9 months and 1 day after your company’s year-end.

• If company year-end is 31st March. Deadline is 1st January (following year).
• If company year-end is 5th April. Deadline is 6th January (following year).
• If company year-end is 30th September. Deadline is 1st July (following year).

3. Personal Tax Returns

If you received dividends or benefits to clear your loan, you must report these on your Self-Assessment tax return.

• 31st October: Deadline for paper submissions (following the end of the tax year).
• 31st January: Deadline for online submissions and paying any tax due (following the end of the tax year).

If you have an overdrawn director’s loan account, you need a plan

An overdrawn director’s loan account is common – and it’s fixable. But without a clear plan, it can trigger a 33.75% (soon to be higher) tax charge, P11D benefits and anti-avoidance issues.

Don’t wait until your year-end to fix this.

If you are worried about an overdrawn DLA, contact THP today. If you are one of our clients – or become one – we’ll review your position and advise on the most tax-efficient way to clear it.