Almost every owner-managed company in the UK has a director’s loan account, and a startling number of directors could not tell you whether theirs is currently in credit or overdrawn. It is not negligence. It is that the account is created by accident, through ordinary behaviour, and only becomes visible when the accountant produces the year-end figures nine or ten months after the behaviour occurred.
Here is the uncomfortable truth that most guides to directors’ loans soft-pedal: the tax charge is not really a tax. It is a deposit, refundable in full when the loan is repaid, and it will still ruin your cash position for over a year. Directors hear “you get it back” and relax. What they should hear is that the company must find 35.75 per cent of the overdrawn balance in cash, pay it to HMRC alongside the corporation tax bill, and then wait, potentially for more than twelve months after repaying the loan, before the money returns.
This piece explains how the account is created, what the section 455 charge now costs after the April 2026 increase, the separate personal tax exposure most guides omit, the anti-avoidance rules that catch the obvious workaround, and how to keep the account out of trouble.
How the account is created without anyone deciding to create one
A director’s loan account records money moving between you personally and your company outside of salary, dividends and legitimate expense reimbursement.
If you have put money in and not taken it back, the account is in credit, and the company owes you. That balance can be repaid to you without tax, which makes it one of the most useful and most forgotten assets a founder holds.
If you have taken more out than you have put in, the account is overdrawn, and you owe the company. This happens through entirely ordinary behaviour: a company card used for something personal, a transfer taken in a tight month against a dividend that was never formally declared, a supplier invoice paid on your behalf. None of it feels like borrowing at the time.
The problem is almost never dishonesty. It is that bookkeeping runs months behind trading, so nobody sees the balance building until the year is closed.
What section 455 now costs
If a close company’s director or shareholder loan remains unpaid nine months and one day after the end of the accounting period, the company pays a corporation tax charge under section 455 of the Corporation Tax Act 2010.
The rate changed this April. Loans advanced on or after 6 April 2026 are charged at 35.75 per cent. Loans advanced before that date remain at 33.75 per cent [1]. The increase followed automatically from the Autumn Budget 2025 decision to raise the dividend upper rate from 33.75 to 35.75 per cent, because the section 455 charge is legislatively tied to that rate and moves with it without separate legislation [1].
The arithmetic is unforgiving. A £20,000 overdrawn balance advanced after 6 April 2026 and left unrepaid produces a charge of £7,150 [2]. Under the previous rate the same balance would have cost £6,750. On £50,000, the charge is £17,875.
Three details compound the pain.
The charge is not deductible for the company [2]. It is reported on the CT600A supplementary pages alongside the corporation tax return, and it falls due on the normal corporation tax date, which for most companies means it arrives in the same month as the main liability.
The refund is slow. The company reclaims the charge once the loan is repaid, but the reclaim is processed against the accounting period in which repayment occurred, and the earliest refund date can fall more than a year after the money went back into the company [3]. A director who repays in October 2026 on a March 2026 year end may not see the refund until January 2028.
And where a loan straddles the rate change, the rate applied depends on when each portion was advanced. HMRC allocates repayments against the oldest outstanding balance by default under the rule in Clayton’s case, unless the director formally directs otherwise [2]. That default is not always in your favour.
The second layer most guides omit
Section 455 is the company’s problem. There is a separate personal exposure, and the threshold that triggers it has not moved in years.
If the overdrawn balance exceeds £10,000 at any point during the tax year and you pay no interest, or interest below HMRC’s official rate, the difference is treated as a benefit in kind. The company reports it on form P11D and pays Class 1A National Insurance, and you pay income tax on the deemed benefit [4].
HMRC’s official rate is 3.75 per cent [4]. That matters more than it used to, because when the official rate was near zero the benefit was trivial. It is no longer trivial.
Two points founders miss. The £10,000 test applies to the balance at any point in the year, not at the year end, so a loan repaid before the accounting deadline can still create a reporting obligation for the period it was outstanding [4]. And charging the company interest at or above the official rate eliminates the benefit in kind entirely [1], which is frequently the cheapest fix available and almost never done.
The workaround that does not work
The obvious move is to repay the loan just before the nine-month deadline and take it out again shortly afterwards. HMRC anticipated this.
Anti-avoidance provisions, generally described as the bed and breakfasting rules, apply where a loan is repaid and a similar amount is drawn again within a short period [5]. Where they bite, the repayment is treated as ineffective for section 455 purposes, and the charge stands. The safe course is to repay with genuine intent to keep the account in credit, not to reset a clock.
Writing the loan off is not an escape either. Where the balance owed by a participator is released or written off, the amount is normally treated as distribution income in the director’s hands [4], so the tax follows you personally rather than disappearing.
The mistakes I see most often
Discovering the balance after the accounts are drafted. By the time the accountant produces year-end figures, several months of the nine have already gone. Directors then find they must fund a repayment they had not planned for, in a window that is closing.
Treating the company account as a flexible personal pot. It feels manageable transaction by transaction. It accumulates into a five-figure balance without a single decision having been made.
Assuming the refund makes the charge harmless. The company still has to find the cash, in the same month as its corporation tax bill, and wait a long time to get it back. Plenty of otherwise healthy companies have had a cash crisis caused entirely by a refundable tax.
Declaring a dividend to clear the balance without checking there are distributable reserves. A dividend can be credited directly against the overdrawn account as a bookkeeping entry rather than paid out and returned [3], which is neat and legitimate. It is only valid if the company has sufficient distributable profits and the paperwork is properly done. An invalid dividend leaves the loan in place and adds a second problem.
Ignoring the £10,000 threshold because the loan was repaid in time. The benefit in kind obligation is separate from section 455 and is tested differently.
Not charging interest. Paying the company interest at the official rate removes the benefit in kind and is usually far cheaper than the tax it avoids.
How to keep the account out of trouble
- Find out where the balance is today. Not at the last year end. Today. If your bookkeeping cannot tell you within a day, that is the first problem to fix.
- Reconcile weekly and code drawings as they happen. Overdrawn accounts are overwhelmingly a bookkeeping-lag problem rather than a spending problem.
- Set a standing alert at £10,000. Crossing it changes your reporting obligations even if you repay before the deadline.
- Diarise nine months and one day after your year end. Work backwards from it. The decision about how to clear the balance needs to be made months before, not weeks.
- Consider charging interest at or above the official rate. It eliminates the benefit-in-kind and the interest is income for the company.
- Plan the clearance route deliberately. Dividend, bonus or cash repayment. Each has different tax consequences, and a dividend now costs more than it did before April, so the choice is worth modelling rather than defaulting.
- Take proper advice before the deadline, not after. Once the nine months have passed, the options narrow to paying the charge and waiting.
The principle underneath all of this
The director’s loan account is the clearest example in UK small business of a problem created by invisibility rather than intent. Nobody sets out to build a £30,000 overdrawn balance. It assembles itself out of ordinary transactions in a business where the bookkeeping runs a quarter behind the trading, and then presents as a tax charge at exactly the moment the corporation tax bill lands.
The fix is not discipline about spending. It is visibility. Directors who know their balance monthly do not have this problem, and directors who find out annually usually do.
Cash tight because of a tax charge you did not see coming? SGI helps owner-managed businesses get the financial visibility that prevents these problems, and arranges funding where the constraint is genuinely cash rather than control. Since 2014, we have advised more than 2,000 businesses across 47 industries. Book a conversation or read about Business Consulting.
SGI is not a tax adviser and does not provide tax advice. Rates and thresholds change at fiscal events. Confirm your position with HMRC guidance or a qualified accountant before acting.
Frequently Asked Questions
What is the section 455 rate for 2026/27?
Loans advanced on or after 6 April 2026 are charged at 35.75 per cent of the outstanding balance. Loans advanced before that date remain at 33.75 per cent. The rate tracks the dividend upper rate, which rose by two percentage points at the Autumn Budget 2025, and it moved automatically with it.
When exactly is the charge triggered?
If the overdrawn balance is not fully repaid within nine months and one day of the end of the accounting period. It is reported on the CT600A supplementary pages and falls due on the normal corporation tax date.
Can I get the tax back?
Yes, once the loan is repaid in full, but slowly. The reclaim is processed against the period in which repayment occurred, so the refund can arrive more than a year after you put the money back. Treat it as a long-dated receivable rather than a temporary inconvenience.
Is there a tax-free amount I can borrow?
There is no exemption from section 455 based on size, but the £10,000 threshold matters for the separate benefit in kind charge. Below £10,000 throughout the tax year, with the loan repaid within nine months, there is generally neither a section 455 charge nor a benefit in kind reporting obligation.
Can I repay the loan and immediately borrow again?
Not effectively. Anti-avoidance rules treat repayments followed by similar fresh borrowing within a short period as ineffective for section 455 purposes, so the charge stands. Repayment needs genuine intent behind it.
What if the company writes the loan off?
Writing it off does not remove the tax consequences. Where a balance owed by a participator is released or written off, the amount is normally treated as distribution income in the director’s hands, so the liability moves to you personally.
References
- Alto Accounting, Section 455 directors’ loan rate 2026/27, June 2026. https://www.alto-accounting.com/insights/section-455-directors-loan-rate-2026-27
- Artifin Accountants, Overdrawn director’s loan account, May 2026. https://artifinaccountants.co.uk/overdrawn-directors-loan-account/
- TurnerBerry, Director’s loan account and s455 tax, June 2026. https://www.turnerberry.co.uk/director-loan-account-s455-tax/
- Bloom Financials, S455 tax: overdrawn directors’ loan accounts explained, June 2026. https://bloomfinancials.com/s455-tax-directors-overdrawn-loan-accounts/
- Ross Martin Tax Consultancy, Directors’ loan accounts: toolkit, April 2026. https://www.rossmartin.co.uk/checklists/489-directors-loan-account-toolkit
- HM Revenue and Customs, Director’s loans, GOV.UK. https://www.gov.uk/directors-loans
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Kurt Graver is the founder and CEO of SGI Consultants, a business consultancy that has helped over 2,000 entrepreneurs establish successful startups using systematic business development methodologies. An accountant with an MBA and 25 years of commerce and consultancy experience, Kurt specialises in strategic planning, market analysis, and sustainable business growth