Director Loan Account: UK Tax Rules, S455 and Repayment Guide for 2026/27
• August 27, 2026
A director loan account is the record a limited company keeps of money moving between the business and a director that is not salary, a dividend, an expense reimbursement or repayment of money previously introduced to the company.
The account can move in either direction. If the director owes money to the company, the director’s loan account is overdrawn. If the company owes money to the director, the account is in credit.
HMRC requires companies to keep records of money directors borrow from or pay into the business, with outstanding balances reflected in the company’s annual accounts.
The tax position becomes more significant where an overdrawn director loan account belongs to a director who is also a shareholder or other participator in a close company.
Depending on the balance, repayment date and interest charged, Section 455 tax, benefit-in-kind rules and National Insurance obligations may apply.
| Director loan account position | What it means | Main issue to consider |
|---|---|---|
| In credit | Company owes the director | Repayment of funds due to the director |
| Overdrawn | Director owes the company | Potential tax and reporting consequences |
| Balance exceeds £10,000 | Significant beneficial loan may exist | Income Tax and benefit-in-kind rules |
| Loan remains outstanding after the tax deadline | Qualifying participator loan remains unpaid | Potential Section 455 charge |
| Loan is released or written off | Director is no longer expected to repay all or part of it | Separate personal and company tax consequences |
How Does a Director Loan Account Work?
A director loan account operates as a running record rather than necessarily representing a single formal loan.
For example, when a director uses company funds for personal expenditure, the amount can be debited to the director’s loan account. Money subsequently repaid to the company reduces that balance.
The account may also move in the opposite direction. A director might personally fund business costs or transfer personal money into the company. Those transactions can create a balance owed by the company to the director.
HMRC specifically identifies cash withdrawals and personal expenses paid with company money as transactions that should be recorded.
At the financial year end, money owed by a director is normally shown as an asset of the company, while money the company owes the director is normally recorded as a liability.
What Does an Overdrawn Director Loan Account Mean?
An overdrawn director loan account means the director owes money to the company.
The important distinction is that withdrawing money from a limited company does not automatically turn that payment into salary or a dividend.
A company is a separate legal entity, so its money does not become a director’s personal money simply because the director controls the business.
Where withdrawals are not covered by salary, legitimate expenses, a properly declared dividend or another amount already due to the director, they may create or increase the director loan balance.
This is where director loan account tax becomes important. For shareholder-directors of close companies, an outstanding loan can potentially fall within the Section 455 regime.
HMRC’s current manual confirms that Section 455 can apply where a close company makes a loan or advance to a participator or an associate of a participator.
What Does It Mean When a Director Loan Account Is in Credit?
A director loan account is in credit when the company owes money to the director.
This often happens where a director has lent personal funds to the business, paid company expenses personally or left amounts due to them within the company.
An account in credit is fundamentally different from an overdrawn DLA. Repaying money genuinely owed to a director will not normally have the same Section 455 implications as a shareholder-director borrowing company money.
Accurate bookkeeping is therefore essential. The tax treatment depends on what each transaction actually represents rather than simply the label attached to the account.
What Tax Is Due on an Overdrawn Director Loan Account?
An overdrawn director loan account does not automatically produce one single tax charge. Several different rules can apply, and they need to be considered separately.
The most prominent company-level charge is Section 455 tax, which can apply to relevant loans from close companies to participators.
A different set of rules can apply where a director receives an interest-free or low-interest employment-related loan. Those rules deal with benefits in kind and can create personal Income Tax and employer National Insurance liabilities.
What Is Section 455 Tax?
Section 455 tax is a Corporation Tax-related charge imposed on a close company in connection with certain loans or advances to participators and their associates.
A participator is broadly a person with a share or interest in the capital or income of the company. In many owner-managed businesses, this means the shareholder-director.
The charge is designed to prevent company profits being extracted indefinitely through loans without the normal tax consequences associated with remuneration or distributions.
Section 455 is a company-side charge. It should not be confused with Income Tax that may arise personally for a director under the beneficial-loan rules or when a qualifying debt is subsequently released or written off.
What Is the Section 455 Tax Rate for 2026/27?
For relevant loans made on or after 6 April 2026, the Section 455 rate is 35.75%.
HMRC’s Company Taxation Manual confirms that the rate was 33.75% for relevant loans made from 6 April 2022 and increased to 35.75% from 6 April 2026.
This date distinction matters. Older articles and even some general guidance may continue to display the previous 33.75% figure, so the date on which the relevant loan or advance was made needs to be checked rather than assuming one rate applies to every outstanding director loan.
As a simple calculation, a qualifying £20,000 loan subject to the 35.75% rate would produce a Section 455 charge of £7,150, assuming the whole amount remained chargeable.
The tax is paid by the company; it does not extinguish the underlying debt. The director can still owe the £20,000 to the business.
What Is the £10,000 Director Loan Rule?
The £10,000 director loan rule relates primarily to the beneficial-loan tax regime rather than the Section 455 repayment deadline.
HMRC states that no beneficial-loan tax charge arises under the small-loan exemption where the total balance outstanding on the relevant beneficial loans does not exceed £10,000 at any time during the tax year, subject to the detailed conditions.
If the aggregate balance moves above £10,000, even temporarily, the exemption may no longer apply for that tax year.
This threshold should therefore not be interpreted as meaning directors are automatically free to borrow £10,000 without considering any other rules. Section 455, company law, accounting treatment and the circumstances of the withdrawal remain separate issues.
When Does a Director Loan Become a Benefit in Kind?
An interest-free or low-interest loan can become a taxable benefit in kind where the relevant employment-related loan rules apply and no exemption is available.
The taxable benefit broadly reflects the difference between interest calculated using HMRC’s official rate and the amount of interest actually paid by the director.
For a non-exempt beneficial loan, the employer generally needs to report the benefit on form P11D and pay Class 1A National Insurance on the taxable value. HMRC’s current guidance expressly applies those obligations to beneficial loans.
For 2026/27, the Class 1A National Insurance rate on expenses and benefits is 15%.
What Is the HMRC Official Interest Rate for 2026/27?
As of 27 August 2026, HMRC’s published official rate of interest is 3.75% from 6 April 2026.
The rate is used when calculating the taxable value of certain employment-related beneficial loans.
Importantly, HMRC now reviews the official rate quarterly, with possible changes taking effect on 6 April, 6 July, 6 October and 6 January.
Companies dealing with a continuing director loan should therefore check the applicable published rate rather than assuming the April figure will necessarily remain unchanged throughout every future tax year.
Can a Director Loan Be Interest Free?
A company can make an interest-free loan to a director, but interest free does not necessarily mean tax free.
Where the beneficial-loan exemption applies including qualifying cases where total relevant balances do not exceed £10,000 throughout the tax year there may be no taxable employment benefit.
Where the exemption does not apply, the difference between the interest actually paid and the interest calculated at HMRC’s official rate can create a taxable benefit.
A company may instead charge sufficient interest to reduce or eliminate the beneficial-loan advantage, although the accounting and tax treatment of that interest must still be recorded correctly.
The benefit-in-kind rules and Section 455 should again be kept separate. Charging interest at the official rate may address the beneficial-loan issue, but it does not by itself remove a Section 455 charge on a qualifying outstanding loan.
01 — Start With The Balance
Who Actually Owes The Money?
A director loan account can move in either direction. That basic distinction changes what the balance represents and whether an overdrawn-loan tax issue may need to be considered.
The director owes money to the company. Where the director is also a shareholder or other participator in a close company, Section 455 and beneficial-loan rules can become relevant depending on the circumstances.
02 — Turn The Tax Dial
Which Rule Is Putting Pressure On The Loan?
The same director loan balance can raise different tax questions. Select a point on the dial to separate Section 455, the beneficial loan threshold and the rules around repaying and borrowing again.
The Company Can Face A Separate Tax Charge
For relevant loans made on or after 6 April 2026, the Section 455 rate is 35.75%. This is a company-side charge and should not be confused with Income Tax that may arise personally for the director.
A qualifying £20,000 loan subject to the 35.75% rate would produce a £7,150 Section 455 charge, assuming the full amount remained chargeable.
The underlying debt remains. The director can still owe the £20,000 to the company even after the company has paid the Section 455 charge.
How Can a Director Repay a Director Loan Account?
The most straightforward way to clear an overdrawn director loan account is for the director to repay the amount into the company’s bank account.
Other methods can be possible where the company genuinely owes another amount to the director.
HMRC’s CT600A guidance recognises that repayment can include money deposited into the company’s bank account or amounts credited to the participator’s loan account through a dividend, director’s remuneration or bonus.
However, the underlying transaction must itself be valid.
Can Salary Clear a Director Loan Account?
Salary, remuneration or a bonus can potentially be credited against an overdrawn director loan account.
That does not mean the remuneration can simply be entered as a bookkeeping adjustment without the normal payroll consequences. PAYE, National Insurance and the company’s reporting responsibilities still need to be considered.
The company must therefore determine the gross remuneration, process it appropriately and record the resulting amount correctly against the director’s account.
Can Dividends Clear a Director Loan Account?
A dividend can potentially be credited against money a shareholder-director owes the company.
However, the company must have sufficient distributable profits and the dividend must be lawfully declared. An overdrawn loan cannot be retrospectively transformed into a valid dividend simply because clearing the DLA would produce a more convenient tax result.
This distinction is especially important where the business has weak profits, accumulated losses or financial difficulties.
Can a Director Repay a Loan and Borrow It Back?
Temporarily repaying a director loan shortly before the Section 455 deadline and then quickly borrowing the money again does not necessarily achieve the intended tax result.
HMRC has anti-avoidance provisions aimed at this practice, often referred to as bed and breakfasting.
What Is the 30-Day Rule for Director Loans?
HMRC’s current 30-day rule can apply where repayments total £5,000 or more and new relevant loans of at least £5,000 are made within the specified 30-day period.
The rules can match the repayment against the new borrowing rather than treating it as clearing the earlier loan.
There is also a separate arrangements rule. HMRC states that this can apply where at least £15,000 is outstanding before repayment and arrangements already exist for at least £5,000 of new borrowing.
Unlike the mechanical 30-day rule, HMRC says the arrangements rule has no equivalent time limit.
Directors considering repayment followed by further borrowing should therefore examine the substance and timing of both transactions rather than assuming a brief repayment automatically eliminates Section 455 exposure.
Does a Director Loan Need Shareholder Approval?
Tax rules are only part of the picture. The Companies Act 2006 can also require member approval for loans to directors.
For a private company that is not associated with a public company, section 197 generally requires member approval for loans to a director of the company or its holding company, subject to statutory exceptions.
One important exception concerns small loans.
The Companies Act explanatory material states that member approval is not required under these provisions where the total value of relevant small loans and quasi-loans does not exceed £10,000. Other exceptions can apply in specific circumstances.
The £10,000 Companies Act threshold should not be confused with the £10,000 beneficial-loan tax exemption. They arise under different legal rules and answer different questions.
A transaction might therefore have one result for company-law approval and another for Income Tax, National Insurance or Section 455 purposes.
How Should a Director Loan Account Be Reported?
A director loan account should be supported by accurate records showing withdrawals, repayments, personal expenditure, interest and amounts introduced into the company.
At the end of the financial year, the balance should be reflected appropriately in the annual accounts.
An amount owed by the director is normally an asset of the company, while a genuine amount owed to the director is normally a liability.
CT600 and CT600A Reporting
Where a close company has made a relevant loan to a participator that has not been repaid within the applicable period, supplementary pages CT600A can be required as part of the Company Tax Return.
HMRC updated its CT600A material in April 2026 and states that the supplementary pages are used where a close company has made a relevant loan that has not been repaid within the period.
The CT600A also deals with claims for relief where qualifying repayments, releases or write-offs occur.
P11D Reporting for Beneficial Loans
Where a director receives a taxable interest-free or low-interest beneficial loan, the company will generally need to report the cash equivalent on form P11D unless an exemption or another permitted reporting treatment applies.
HMRC’s P11D guidance specifically requires details of relevant director and employee loans where no interest was paid or the interest charged was below the official rate.
What Happens If a Director Loan Is Written Off?
Writing off a director loan is not the same as the director repaying it.
Section 458 relief can become available to the company in respect of Section 455 when a qualifying loan is repaid, released or written off. However, removing the company-side Section 455 exposure does not mean the director escapes a personal tax consequence.
Where the relevant statutory conditions are satisfied, a released or written-off close-company loan can create an Income Tax charge for the participator. Separate National Insurance rules may also apply.
Recent tribunal proceedings show why the substance of a loan write-off matters.
The HMRC director’s loan tax tribunal ruling in HMRC v Gary Quillan [2026] UKUT 300 (TCC) found that an outstanding director’s loan balance had been written off for tax purposes even though no prescribed formal document expressly recorded the write-off.
The ruling demonstrates why directors should not assume an unpaid DLA remains outside the write-off rules merely because the debt has not been formally cancelled in familiar wording. The facts, recovery activity and documentation surrounding the debt can matter.
What Happens to a Director Loan Account if the Company Becomes Insolvent?
An overdrawn director loan account does not disappear when a company becomes insolvent.
HMRC describes the overdrawn loan balance as an asset of the company. Once liquidation begins, an administrator or liquidator can seek repayment of money owed by the director.
That can place directors in a difficult position where significant personal withdrawals accumulated before the business failed.
The eventual tax treatment will depend on what happens to the balance. It may be repaid in full, partly recovered, settled, released or written off. Each outcome can carry different consequences.
The 2026 Quillan Upper Tribunal decision is particularly relevant in this area because it confirms that, for the tax provision considered in that case, a write-off can depend on the practical substance of what has happened to the debt rather than simply whether a formal release document exists.
Directors of financially distressed companies should therefore avoid assuming that an overdrawn DLA is merely an accounting entry. It represents money potentially recoverable by the company and, in an insolvency, ultimately for the benefit of creditors.
Conclusion
A director loan account can be straightforward to manage, but an overdrawn balance may create Section 455 tax, benefit-in-kind and reporting consequences.
Directors should keep accurate records, monitor repayment deadlines and check the latest HMRC rules before making decisions about repayment, interest or write-offs.
FAQ
What Is A Director Loan Account?
A director loan account records money a director borrows from or pays into their company outside normal salary, dividends and expense repayments.
Is A Director Loan Account Taxable?
Not automatically, but an overdrawn balance can trigger Section 455 tax, benefit-in-kind charges and other tax consequences.
What Happens If A Director Loan Exceeds £10,000?
If relevant beneficial loans exceed £10,000, the small-loan exemption may no longer apply and a taxable benefit can arise.
How Long Can A Director Loan Remain Outstanding?
A loan can remain outstanding, but Section 455 tax may apply if a qualifying balance is not cleared within nine months and one day after the relevant accounting period ends.
Can A Director Loan Be Repaid With A Dividend?
Yes, provided the company has sufficient distributable profits and the dividend is lawfully declared and correctly credited.
Can A Director Loan Be Interest Free?
Yes, but an interest-free or low-interest loan may create a taxable benefit if the relevant exemption does not apply.
Can Section 455 Tax Be Reclaimed?
Yes, qualifying Section 455 tax can generally be reclaimed after the loan is repaid, released or written off, subject to HMRC rules and timing.
