What the account tracks
Every owner-managed company has a director’s loan account (DLA), even if you’ve never called it that. It captures anything that isn’t salary, dividends or genuine expense reimbursement: money you draw ad hoc, company costs you paid personally, personal costs the company paid. If, at the year end, you’ve taken more than you’re owed, the account is overdrawn — in law, you owe the company money — and that’s where the tax rules bite.
The S455 tax charge
If the DLA is overdrawn at the year end and still outstanding 9 months and 1 day later, the company must pay S455 tax at 33.75% of the amount outstanding. It’s a deposit, not a permanent tax: HMRC refunds it after the loan is repaid or written off — but slowly (you reclaim it 9 months after the end of the year in which it’s cleared), so it can lock up cash for a long time.
The £10,000 benefit-in-kind trap
Separately, if your overdrawn loan exceeds £10,000 at any point in the tax year, HMRC treats it as a benefit in kind. The company reports it on a P11D and pays Class 1A National Insurance, and you’re taxed on the difference between HMRC’s official rate of interest and whatever interest you actually paid the company. Keeping the balance under £10,000 — or paying interest at the official rate — avoids this.
Don't try to 'bed and breakfast' it
Repaying the loan just before the deadline and re-borrowing straight after used to dodge the S455 charge. HMRC’s anti-avoidance rules now block it: broadly, a repayment is ignored if £5,000 or more is redrawn within 30 days, or where there are arrangements to take the money back out. Treat repayments as real, not cosmetic.
Clearing an overdrawn loan
- Repay it personally before the 9-month deadline — simplest, no tax
- Declare a dividend to clear it — only if there are distributable profits, with the usual dividend tax
- Vote a bonus — clears it but carries PAYE and National Insurance
- Write it off — possible but taxed on you as income and rarely the best route
The right move depends on your profits and personal tax band — and it needs deciding before the 9-month deadline, not after. We plan the DLA as part of your year end. Call 0114 327 1480.