You took a bit of cash out of your company to cover a personal bill, told yourself you'd sort it out at year-end, and now your accountant is using the words "overdrawn director's loan account" and "S455". That's the moment most directors first meet the DLA, and it's usually mid-panic.
It doesn't need to be stressful. A director's loan account is just a running record of money that moves between you and your company outside of salary, dividends and expenses. Get it wrong and it can trigger an extra Corporation Tax charge and a personal tax bill. Get it right and it's a perfectly normal, flexible part of running a limited company.
This guide explains what a DLA is, what happens when it goes overdrawn, exactly how the S455 tax charge works for 2025/26, how to repay it, and the traps to avoid. It's written for owner-directors of UK limited companies and people just setting one up.
What is a director's loan account?
A director's loan account is the bookkeeping record of all money that flows between you and your company that isn't salary, dividend, or repayment of a legitimate business expense.
It works in two directions. When you take money out that isn't one of those things, you owe the company, and the account goes overdrawn. When you put your own money in, the company owes you, and the account is in credit. The balance sits on your company's balance sheet at the year-end.
Most owner-managed companies run a DLA without even realising it. You pay a personal Amazon order from the business card, the company settles your phone bill, you lend the company £3,000 to cover a slow month. Every one of those goes through the loan account.
The account itself isn't a problem. The tax only bites when the account is overdrawn, meaning you owe the company money, at the wrong moment.
What counts as a director's loan?
HMRC treats it as a director's loan whenever you (or a close family member) take money from the company that is not:
- a salary, dividend or expense repayment, or
- money you've previously paid in or lent to the company.
So a formally declared dividend isn't a loan. A salary run through PAYE isn't a loan. Reimbursing yourself for a genuine business cost isn't a loan. Pretty much everything else you draw out is.
The common culprits are personal spending on the company card, drawings taken "on account" before profits are confirmed, and dividends voted without enough distributable profit to support them. That last one is important: if you vote a dividend the company can't legally pay, HMRC can reclassify it as a loan, and you're straight into overdrawn DLA territory.
What is an overdrawn director's loan account?
Your DLA is overdrawn when you owe the company more than you've put in. In plain terms, you've taken out more than your salary, dividends and expense repayments add up to.
This is extremely common for owner-directors who draw money throughout the year and only formalise dividends at the year-end. During the year the account drifts overdrawn, then a dividend declaration clears it.
The risk is the balance that's still outstanding at and after the company's year-end. That's what HMRC looks at, and that's what can trigger the S455 charge.
What is S455 tax and how much is it?
S455 is a Corporation Tax charge on the company (not on you personally) when a director who is also a shareholder, or an associate of one, owes the company money at the year-end and hasn't repaid it in time.
For loans made on or after 6 April 2022, the S455 rate is 33.75% of the outstanding balance (gov.uk). That rate deliberately mirrors the dividend upper rate of 33.75% for 2025/26 (gov.uk), so HMRC isn't out of pocket if you use a loan instead of taking a dividend.
The charge applies to whatever is still outstanding 9 months and 1 day after the end of the company's Corporation Tax accounting period (gov.uk). Repay before then and there's no S455 to pay at all.
The crucial thing to understand is that S455 is refundable. It's effectively a deposit HMRC holds until the loan is cleared. Once you repay, write off or release the loan, the company can reclaim the tax. But the reclaim is slow, so it's far better not to trigger it in the first place.
How do you avoid or reclaim the S455 charge?
There are two ways to deal with S455: avoid it, or reclaim it after the fact.
Avoiding it. Clear the overdrawn balance within 9 months and 1 day of your accounting period end and no S455 is due. You can repay in cash, or you can clear it by voting a dividend or a bonus (subject to the company having the profits and you accepting the personal tax that comes with those).
Reclaiming it. If S455 has already been paid and you later repay, write off or release the loan, the company can claim the tax back. You claim 9 months and 1 day after the end of the accounting period in which the loan was repaid (gov.uk). In practice that can mean waiting well over a year for the refund, which is why prevention beats cure.
What is a benefit in kind on a director's loan?
Separately from S455, an overdrawn loan can create a personal tax charge if the company charges you little or no interest.
If your overdrawn balance is more than £10,000 at any point in the tax year and you're charged interest below HMRC's official rate (or no interest at all), the difference is a taxable benefit in kind (gov.uk). The company reports it on a P11D, pays Class 1A National Insurance on it, and you pay Income Tax on the benefit through your tax code or Self Assessment.
The official rate of interest for 2025/26 is 3.75%, applying from 6 April 2025 (gov.uk).
You can sidestep the benefit in kind entirely by having the company charge you interest at or above the official rate and actually paying it. Note that interest the company receives is taxable income for the company.
What is bed and breakfasting and why does HMRC block it?
"Bed and breakfasting" is the old trick of repaying a loan just before the 9-month deadline, then taking it straight back out again a few days later, so on paper the loan looks repaid but nothing has really changed.
HMRC has anti-avoidance rules that block this (gov.uk):
- If you repay £5,000 or more and then take another loan of £5,000 or more within 30 days, the repayment is matched against the new loan, so S455 can still apply.
- For balances of £15,000 or more, if there was an intention or arrangement to redraw the money when you repaid it, S455 can apply even outside the 30-day window.
The takeaway: a genuine, permanent repayment clears the charge. A repayment that's really just a quick round-trip does not.
Illustrative example: an overdrawn DLA from start to finish
Illustrative example. Sam is the sole director and shareholder of a small consultancy with a 31 March year-end. During the year to 31 March 2026, Sam draws £40,000 in cash for living costs but only formally votes £25,000 in dividends and takes a £12,570 salary. The salary and dividend are sorted, but £15,000 of drawings sits in the loan account with nothing to offset it.
At 31 March 2026, Sam's DLA is overdrawn by £15,000.
Option A: Sam repays in time. Sam has until 1 January 2027 (9 months and 1 day after 31 March 2026) to clear it. In November 2026 the company has enough distributable profit, so Sam votes a £15,000 dividend and uses it to clear the loan. Result: no S455 charge. Sam does pay dividend tax on that £15,000 personally, at the 8.75% ordinary rate or 33.75% upper rate for 2025/26 depending on the rest of Sam's income (gov.uk), but the company avoids S455 altogether.
Option B: Sam does nothing. The £15,000 is still outstanding on 1 January 2027. The company must now pay S455 at 33.75%:
| Item | Amount |
|---|---|
| Overdrawn DLA at year-end | £15,000.00 |
| S455 rate (loan made after 6 Apr 2022) | 33.75% |
| S455 tax payable by the company | £5,062.50 |
That £5,062.50 is due alongside the company's Corporation Tax for the year. It's refundable, but only once Sam clears the loan, and the company won't see the money back until 9 months and 1 day after the end of the accounting period in which repayment happens. On top of that, because the balance exceeded £10,000, Sam may also have a benefit-in-kind charge if no interest at the 3.75% official rate was paid.
The arithmetic: £15,000 x 33.75% = £5,062.50. The lesson: repaying before 1 January 2027 would have cost Sam nothing beyond the normal dividend tax, while doing nothing ties up £5,062.50 of company cash for well over a year.
How do you repay an overdrawn director's loan?
You've got several routes, and they're often combined. The right mix depends on your profits and your personal tax position, which is exactly the kind of thing it pays to model before year-end.
- Pay cash back in. The cleanest option. Transfer personal money into the company before the 9-month deadline and the loan is gone.
- Vote a dividend. If the company has enough distributable (post-tax) profit, declare a dividend and offset it against the loan. You pay personal dividend tax, but you clear the loan without finding new cash.
- Pay a bonus or salary. Run an additional payment through PAYE and offset it. This attracts Income Tax and National Insurance, so it's usually less efficient than dividends, but it works when profits are tight.
- Write the loan off. The company can formally release the loan, but a write-off is taxed on you broadly like a dividend and can create National Insurance issues, so take advice first.
Whatever route you choose, the test HMRC applies is whether the repayment is real and permanent, not a 30-day round trip (see bed and breakfasting above).
If your company is also weighing up its overall tax position, our corporation tax services and tax advisory team can map the most efficient way to clear a DLA. And if you're deciding between drawing dividends or salary, run the numbers first with our dividend tax calculator.
What if the company owes you money instead?
Plenty of directors are in the opposite position: you've funded the company out of your own pocket, so the DLA is in credit and the company owes you.
This is generally good news. You can draw that money back out tax-free whenever the company has the cash, because you're simply being repaid your own funds. There's no S455 and no benefit in kind.
You can even charge the company interest on the loan if you want, which is taxable income for you and may need reporting, but there's no automatic tax charge just for having a credit balance.
FAQs
Is a director's loan account illegal?
No. A director's loan account is a completely normal part of running a limited company. It only creates a tax cost when it's overdrawn at the year-end and stays unpaid past the deadline, or when a large balance is left interest-free.
How long do I have to repay a director's loan before S455 applies?
You have 9 months and 1 day after the end of your company's Corporation Tax accounting period. Repay the overdrawn balance by then and no S455 is due. Miss it and the company pays S455 at 33.75% on the outstanding amount for loans made on or after 6 April 2022.
Can I get the S455 tax back?
Yes. S455 is refundable once you repay, write off or release the loan. The company reclaims it 9 months and 1 day after the end of the accounting period in which the loan was repaid, so the refund can take well over a year to arrive.
Do I pay personal tax on a director's loan?
Potentially. If your overdrawn balance tops £10,000 during the tax year and you pay interest below HMRC's official rate of 3.75% for 2025/26, the shortfall is a benefit in kind, with Income Tax for you and Class 1A National Insurance for the company. Charging and paying interest at the official rate avoids this.
What happens if I just take the money out again after repaying?
HMRC's anti-avoidance rules catch this. Repay £5,000 or more and take another loan of £5,000 or more within 30 days, and the repayment is matched against the new loan so S455 can still apply. For balances of £15,000 or more, an arrangement to redraw can trigger the charge even outside 30 days.
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Key takeaways
- A DLA tracks money between you and your company that isn't salary, dividends or expenses.
- An overdrawn DLA left unpaid 9 months and 1 day after your year-end triggers S455 at 33.75% on the company.
- S455 is refundable, but reclaiming it is slow, so clearing the loan in time is far better.
- Balances over £10,000 with no official-rate interest create a personal benefit in kind.
- Repayments must be genuine and permanent; bed and breakfasting is blocked.
Not sure whether to clear your loan with a dividend, a bonus, or fresh cash before year-end? Book a free 20-minute call with a Zmartly accountant and we'll model the most tax-efficient way to clear your director's loan account. Visit zmartly.co.uk/contact to get started. If you run a limited company or you're a startup finding your feet, this is exactly the kind of thing we sort before it becomes a problem.
