How a director loan account works, the section 455 charge on an overdrawn loan, the £10,000 benefit in kind rule, and how to avoid the tax traps.
A director's loan account is one of those parts of running a limited company that sounds technical but is actually quite simple, and getting it wrong can be expensive. If you ever take money out of your company that is not salary, dividends or expenses, you are using your director's loan account. This guide explains how it works in 2026/27, the tax charges that can apply, and how to stay on the right side of them.
A director's loan account, often shortened to DLA, is simply a record of money that moves between you and your company outside of salary, dividends and legitimate expenses. If you put your own money into the company, the company owes you, and the account is in credit. If you take money out that is not pay, dividends or expense reimbursement, you owe the company, and the account becomes overdrawn.
If you have lent money to your company, you can draw that back out at any time without tax, because it is your own money being returned. The company can even pay you interest on the loan, although that interest is taxable income for you and has its own reporting requirements.
The issue arises when the account is overdrawn, meaning you owe the company. If the loan is not repaid within 9 months and 1 day of the end of the company's accounting period, the company must pay a temporary tax charge, known as the section 455 charge, of 33.75% of the outstanding amount. The good news is that this charge is refundable to the company once you repay the loan, but the refund can take time, so it ties up cash in the meantime.
Separately, if your overdrawn loan is more than £10,000 at any point in the year, it is treated as a benefit in kind, like an interest free loan from your employer. That means you pay income tax on the benefit and the company pays Class 1A National Insurance, unless you pay the company a commercial rate of interest. Keeping an eye on the £10,000 threshold is therefore important.
HMRC has rules to stop directors simply repaying a loan just before the deadline and taking it out again straight after, a practice known as bed and breakfasting. If you repay and then re borrow similar amounts within a short period, the repayment may be ignored for tax purposes, so the charge can still apply. It is not a loophole worth trying.
The simplest way to stay clear of charges is to keep good records, avoid letting the account become significantly overdrawn, and clear any overdrawn balance within the 9 month window. Where you do need to take money out, planning it properly as salary or dividends, with the profit to support it, usually avoids the loan account becoming an issue at all.
Money you take out of your company that is not salary, dividends or expenses, or money you lend to your company. It is tracked in your director loan account.
If not repaid within 9 months and 1 day of the year end, the company pays a 33.75% section 455 charge, which is refundable once you repay the loan.
If the overdrawn balance exceeds £10,000 at any point, it is treated as a benefit in kind, with income tax and Class 1A National Insurance unless you pay interest.
No. HMRC bed and breakfasting rules can ignore repayments that are quickly followed by similar new borrowing, so the charge can still apply.
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