Overdrawn Director’s Loan Account

What Is S455 Tax, and How Does It Affect Your Company?

Many limited company directors treat the company bank account as a flexible pot. A quick transfer here, a personal payment there. It feels manageable, but HMRC tracks every penny of it.

If your director’s loan account (DLA) becomes overdrawn and is not cleared on time, Section 455 of the Corporation Tax Act 2010 applies. The S455 tax charge for 2026/27 now sits at 35.75% of the outstanding balance. That is a significant cost for something that is entirely avoidable with proper planning.

This guide explains what a director’s loan account is, how S455 tax works, and what directors of UK limited companies need to do to stay on the right side of HMRC.

What Is a Director’s Loan Account?

A director’s loan account is a running ledger that records all financial transactions between a director and their company. It is not a bank account. It is a bookkeeping record.

The DLA tracks the money the director puts into the company and the money taken out. Transactions that go through a DLA include:

• Personal cash withdrawals not recorded as salary or dividends
• Company payments made for personal expenses
• Personal funds lent to the company
• Expense reimbursements are already accounted for elsewhere

If the company owes the director money, the account is in credit. That balance can be repaid tax-free.

If the director owes the company money, the account is overdrawn. That is when tax problems arise. Many directors do not realise their DLA is overdrawn until year-end. Bookkeeping delays, unrecorded drawings, and undeclared expense payments all contribute. Regular reconciliation prevents surprises.

What Is S455 Tax?

The S455 tax is a corporation tax charge that applies when a close company makes a loan to a director or shareholder and the loan is not repaid within nine months and one day of the accounting year-end.

Under Section 455 of the Corporation Tax Act 2010, HMRC treats the outstanding balance as a tax liability for the company. The charge is not a fine or permanent penalty. It is a temporary tax that the company pays upfront and can later reclaim.

The purpose is straightforward. Without S455, directors could extract company profits tax-free through loans rather than salary or dividends. The charge exists to close that gap.

Who Does S455 Tax Apply To?

S455 only applies to closed companies. A close company is one controlled by five or fewer participants (typically shareholders or directors). Most small and medium-sized UK limited companies fall into this category.

Public limited companies are generally excluded. Sole traders and partnerships are not affected either, as there is no separate legal entity involved.

S455 Tax Rate for 2026/27

The S455 tax rate changed on 6 April 2026 following the increase in dividend tax rates announced in the November 2025 budget.

The rate mirrors the dividend upper rate. For loans spanning both periods, the rate applied depends on when each portion of the loan was advanced. HMRC will allocate repayments against the oldest outstanding balance by default, using the rule in Clayton’s case, unless the director formally directs otherwise.

Example: A director has an overdrawn DLA of £20,000 at the 2026/27 year-end. The loan was made after 6 April 2026 and is not repaid within nine months. The company must pay S455 tax of £7,150 (35.75% of £20,000) alongside its corporation tax return.

This amount is reported on the CT600A supplementary pages when filing the corporation tax return. It is not a deductible expense for the company.

The Nine-Month Repayment Deadline

The trigger for the S455 tax is simple. If the overdrawn balance is not fully repaid within nine months and one day of the accounting year-end, the charge applies to the outstanding amount.

Example: Company year-end is 31 March 2026. The S455 deadline falls on 1 January 2027. Any overdrawn balance still outstanding on that date triggers the charge.

Full repayment before the deadline eliminates the S455 liability. Partial repayment reduces the taxable amount. Any repayment made after the deadline does not reduce the original charge, though the S455 tax can be reclaimed once the loan is eventually cleared.

Always aim to repay at least two weeks before the deadline. A late bank transfer or processing delay could mean the deadline is missed by a day.

How to Repay an Overdrawn Director’s Loan Account

There are several ways to clear an overdrawn DLA. Each has different tax implications.

Cash Repayment

The director transfers personal funds back into the company bank account. This is the cleanest solution and creates a clear audit trail with no further tax consequences.

Declare a Dividend

If the company has sufficient distributable reserves, the director can declare a dividend and offset it against the loan balance. The dividend must be properly documented with board minutes and dividend vouchers. Note that the director will still pay personal income tax on the dividend.

Bonus or Salary

The company can pay the director additional salary or a bonus and use it to offset the loan. This triggers income tax and National Insurance for the director and employer NIC for the company. It is rarely the most tax-efficient option.

Write Off the Loan

If the company formally writes off the DLA balance, that amount is treated as a distribution. The director pays income tax on it through self-assessment, and the company cannot claim corporation tax relief on the written-off amount under S321A of the Corporation Tax Act 2009.

Reclaiming S455 Tax

S455 tax is refundable once the loan is repaid, written off, or released. Reclaiming is not automatic.

• If the loan is repaid within nine months of the relevant year-end: Include the repayment details in the CT600A when filing the corporation tax return for that period.
• If the loan is repaid after nine months: Submit form L2P to HMRC. The earliest this can be submitted is nine months and one day after the year-end in which the repayment occurred. This means the cash can be tied up for over a year before a refund is processed.

HMRC allows claims within four years from the end of the accounting period in which repayment was made. Claims beyond that window are out of time.

The delay between repaying the loan and receiving the S455 refund is one reason why prevention is far cheaper than remediation.

Benefit-in-Kind Risks on Loans Over £10,000

S455 is not the only tax exposure from an overdrawn DLA. If the loan exceeds £10,000 at any point during the tax year, HMRC treats it as a benefit in kind (BiK) unless interest is charged at or above the official rate.

For 2026/27, HMRC’s official rate of interest for beneficial loan arrangements is 3.75%. This rate is reviewed quarterly and may change during the year.

If the director pays no interest on a £30,000 loan, the taxable benefit is approximately £1,125 (3.75% of £30,000). The consequences are:

• The director pays income tax on the benefit via self-assessment
• The company reports the benefit on form P11D and pays Class 1A National Insurance at 13.8%

To avoid a BiK charge, keep loan balances below £10,000 or charge interest at the official rate with proper documentation. Interest paid must be real, not a notional year-end adjustment.

HMRC Compliance and Common Mistakes

HMRC cross-references director loan accounts during compliance reviews. Companies showing low salaries, low dividends, and high withdrawals are more likely to attract scrutiny.

The Bed and Breakfasting Rule

One of the most common mistakes is repaying the loan just before the deadline and then immediately withdrawing the same amount again. HMRC introduced anti-avoidance rules specifically for this.

If a director repays £5,000 or more and takes out a new advance within 30 days, HMRC treats the repayment as ineffective for S455 purposes. The original charge still applies.

Treating the Company Account as Personal

Every withdrawal must be recorded. Undocumented drawings will appear in the DLA automatically, creating an unexpected overdrawn balance at year-end.

Declaring Dividends Without Checking Profits

Clearing a DLA by declaring a dividend only works if the company has sufficient distributable reserves. An unlawful dividend can create personal liability for the director and will not satisfy the S455 repayment requirement properly.

Poor Documentation

Board minutes, dividend vouchers, payroll records, and bank narratives all matter. HMRC expects a full paper trail. Missing documentation increases audit risk considerably.

Strategic Planning to Avoid S455

The directors who never pay S455 tax are the ones who monitor their DLA throughout the year rather than discovering problems at year-end.

Practical steps to stay ahead:

• Reconcile the DLA monthly, not just at year-end
• Mark the nine-month deadline in your diary immediately after the year closes
• Agree on a drawing policy with your accountant at the start of each financial year
• Review distributable reserves before declaring dividends to offset the loan
• Use accounting software to flag overdrawn balances in real time

For growing businesses, connecting corporation tax planning with cash flow management is particularly important. Directors who review their accounting and compliance services regularly are better positioned to identify DLA issues before they become costly.

If your company operates across multiple financial years with recurring loan balances, a structured repayment plan agreed with your accountant is far more effective than reactive fixes.

Conclusion

An overdrawn director’s loan account is one of the most common and most avoidable sources of unexpected corporation tax costs for UK limited companies. With S455 tax now at 35.75% for new loans from April 2026, the financial case for proper DLA management has never been clearer.

The key actions are straightforward. Monitor your DLA throughout the year, plan repayments before the nine-month deadline, document everything, and avoid the bed and breakfasting trap.

If you are unsure whether your current DLA position creates a tax liability, or if you want to review your profit extraction strategy before the next year-end, our transparent pricing and service options are a good place to start.

Sources: Corporation Tax Act 2010, Section 455 | HMRC CT600A Guidance | HMRC Beneficial Loan Arrangements Official Rates (GOV.UK) | HMRC Employment Income Manual EIM26261