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Most small company directors dip into the company's bank account at some point. A personal cost paid on the company card, a quick transfer to cover a bill, a drawing taken before profits are confirmed. None of that is wrong in itself, but it all lands in the same place: your director's loan account. The trouble starts when that account is overdrawn at the year end and stays that way, because that is when HMRC's section 455 charge bites. In 2026 the cost of getting it wrong went up, so it is worth understanding before your next year end, not after.
What a director's loan account actually is
A director's loan account, or DLA, is simply a running record of money moving between you and your company that is not salary, dividends, or reimbursed business expenses. Money you put in counts in your favour. Money you take out beyond what the company owes you counts against you.
When your withdrawals exceed what you have put in or properly earned, the account is overdrawn, which means you owe the company. HMRC treats that as the company having lent you money. The DLA exists only for limited companies, because it reflects the fact that the company is a separate legal entity from you, even if you own all of it.
When an overdrawn loan becomes a tax problem
The charge that catches directors out is section 455 of the Corporation Tax Act 2010. It applies to close companies, which is the technical term for a company controlled by five or fewer participators, or any number of participators who are also directors. In plain terms, almost every owner-managed UK company is a close company, so for most readers this applies.
The rule is straightforward. If your loan account is still overdrawn nine months and one day after the end of your company's accounting period, the company has to pay section 455 tax on the outstanding balance. That deadline is the same date your normal Corporation Tax falls due. Clear the balance before then, by repaying cash, declaring a dividend, or paying a salary or bonus, and no section 455 charge arises at all.
It is also worth being clear who pays. Section 455 is paid by the company, not by you personally, and it is reported through the CT600A pages of the Company Tax Return. It is collected alongside Corporation Tax, but it is a separate charge calculated on the loan, not tax on your trading profit.
The 2026 change: the rate is now 35.75%
Here is the part that changed. The section 455 rate is deliberately tied to the dividend upper rate, so that borrowing from your company is not a cheap way to sidestep dividend tax. When the Autumn 2025 Budget raised the dividend upper rate from 33.75% to 35.75% from 6 April 2026, the section 455 charge rose with it, automatically.
So loans made or benefits conferred on or after 6 April 2026 are charged at 35.75%, while older advances stay at 33.75%. The rate is fixed by when the loan was made, not when the nine-month deadline falls. That creates a subtlety for directors whose balance built up across the change: part of it can be charged at the old rate and part at the new one. If you repay only some of it, how that repayment is allocated matters, and HMRC will generally treat repayments as clearing the oldest borrowing first unless you document otherwise. If your balance straddles 6 April 2026, it is worth recording your intentions clearly.
A worked example
Say your company has a 31 March year end. During the 2026 to 2027 year you draw GBP30,000 more than you are entitled to, so at 31 March 2027 your loan account is GBP30,000 overdrawn. Your Corporation Tax, and any section 455 charge, is due by 1 January 2028.
If you have not cleared that GBP30,000 by 1 January 2028, the company must pay section 455 tax of 35.75%, which is GBP10,725, on top of its normal Corporation Tax. Repay the loan in full before that date and the charge simply does not arise. That single deadline is the difference between a tidy year end and a five-figure cash hit.
The charge is refundable, but the cash is tied up for a long time
Section 455 is often described as a temporary tax, and it is, but the timing of the refund is where people get a nasty surprise. The company can reclaim the charge once the loan is repaid, written off, or released. The catch is that the refund is not available immediately. It only becomes claimable nine months and one day after the end of the accounting period in which the repayment happened.
In practice that means the cash can be locked up with HMRC for well over a year, even if you repay the loan soon after the charge was paid. Claims are made through the Company Tax Return if within the time limit, or otherwise using HMRC's form L2P, and there is a four-year window to claim. So while you usually get the money back, treating section 455 as harmless because it is refundable misses the cash-flow damage it does in the meantime.
How to clear an overdrawn loan, and what each route costs
There are three usual ways to clear the balance before the deadline, and they are not equally cheap:
- Repay in cash from personal funds. This is the cleanest option with no personal tax consequence. The obvious snag is finding the money, which is exactly what directors who have drawn heavily often cannot do.
- Declare a dividend to clear it, if the company has enough distributable profit. This credits the loan account, but the dividend is taxable on you personally at dividend rates, which in 2026 to 2027 are 10.75%, 35.75% or 39.35% depending on your band. It must be properly minuted, not backdated.
- Pay a salary or bonus to clear it. This works, but it attracts PAYE and both employee and employer National Insurance, so it is usually more expensive than a dividend, though it can suit a director with unused personal allowance.
Sometimes the smartest move is to accept the section 455 charge and clear the loan later, when a dividend or repayment can be done more tax-efficiently. The right answer depends on your distributable profits, your other income, and your cash position, which is why this is rarely a one-size decision.
The separate GBP10,000 benefit-in-kind trap
Section 455 is not the only issue. If your loan balance goes over GBP10,000 at any point in the tax year, the loan is also treated as a taxable benefit in kind unless you pay the company interest at least at HMRC's official rate, which is 3.75% from 6 April 2026. Where it applies, the company must report it on a P11D and pay Class 1A National Insurance on the benefit, and you may pay Income Tax on it too. This is entirely separate from section 455 and can apply even where the loan is repaid in time to avoid the section 455 charge.
Do not try to repay and re-borrow around the deadline
A tempting but dangerous tactic is to repay the loan just before the nine-month deadline and then draw it straight back out afterwards. HMRC closed this down years ago with anti-avoidance rules, often called the bed and breakfasting rules, which can ignore a repayment that is quickly followed by fresh borrowing. A repayment only helps if it is genuine, so do not rely on a paper round-trip to dodge the charge.
Writing the loan off is not a clean escape either
If the company formally writes off or releases the loan, the section 455 problem goes away, but a new one appears for you. A written-off loan to a participator is generally taxed on you as if it were a distribution, broadly like a dividend, and there can be National Insurance consequences too. An unresolved overdrawn loan also becomes a real obstacle if you ever want to close the company, and it is a common flashpoint in HMRC enquiries. It is far easier to manage the balance during the year than to unpick it later.
The practical verdict
A director's loan account is a normal part of running a small company, not a sign you have done something wrong. The danger is leaving it overdrawn and unmonitored until the year end has passed and the nine-month clock is running. In 2026 the stakes are slightly higher, because the section 455 rate climbed to 35.75% and the cost of an unmanaged balance went up with it.
The directors who avoid the trap do three simple things: they keep the loan account up to date rather than reconstructing it at year end, they know their nine-month deadline and diary it, and they decide early whether to repay in cash, vote a dividend, or accept the charge. If you are also weighing how to take money out of the company in the first place, our guide on dividends versus salary covers the wider picture.
This article is for general information and reflects UK guidance available as of June 2026. Director's loan and section 455 planning is highly fact-specific, so check your own position before acting.