Director's Loan Accounts: Tax Rules Every UK Director Should Know
Reviewed by Usman, Senior Accountant · Route Business Hub · Last reviewed 15 July 2026
A director's loan account records money owed between a director and their company that isn't salary, dividend, or a business expense repayment. It sounds like an obscure bookkeeping line item until it goes overdrawn past the wrong deadline — at which point it becomes a real, and avoidable, extra tax cost.
What actually creates a director's loan (and how it's different from a dividend)
Any money taken from the company that isn't salary, a properly declared dividend, or reimbursement of a genuine business expense is recorded as a loan from the company to the director, tracked through the director's loan account.
Accounts commonly go overdrawn without anyone intending it: personal expenses paid from the business account, dividends declared without enough distributable reserves to actually support them (an invalid dividend can be recharacterised as a loan instead), or drawings taken in anticipation of a dividend that's never formally declared through the proper paperwork.
The 9-month deadline and Section 455 tax
If an overdrawn director's loan isn't repaid within 9 months and 1 day after the company's year-end, the company must pay Section 455 tax (see GOV.UK's guidance on director's loans) — currently 35.75% of the outstanding balance, matching the higher dividend tax rate (which rose 2 percentage points from 6 April 2026) — on top of anything the director personally owes.
This isn't a permanent tax loss: the company can reclaim the Section 455 tax once the loan is actually repaid, but the reclaim can take a long time to come back — broadly not until 9 months after the end of the accounting period in which repayment happened — which makes it a real cash-flow cost even though it's technically refundable.
"Bed and breakfasting" — repaying a loan just before the deadline and re-drawing it shortly afterwards — is specifically targeted by anti-avoidance rules and doesn't work as a workaround if the repayment and re-draw are close enough together in time and value.
A worked example: a £30,000 overdrawn loan
Not repaid within 9 months and 1 day of the year-end: Section 455 tax = 35.75% × £30,000 = £10,725, due alongside the corporation tax return.
Refundable once the loan is actually repaid — but not until 9 months after the end of the accounting period in which repayment happens, which can mean the company's cash is tied up for a long time even though the tax isn't permanently lost.
Benefit-in-kind tax if the loan is large and interest-free
A director's loan over £10,000 that doesn't charge at least HMRC's official rate of interest is treated as a benefit in kind — the director pays income tax on the interest they didn't pay, and the company pays Class 1A National Insurance on the same benefit.
This applies in addition to, not instead of, the Section 455 charge if the loan is also still overdrawn past the 9-month deadline. The two rules address different problems, and both can apply to the same loan at once.
How to actually manage a director's loan account instead of discovering a problem at year-end
Reconcile the director's loan account as part of regular bookkeeping, not just once a year when the accounts are prepared — an account that's quietly drifted overdrawn for months is a much worse surprise at year-end than one monitored monthly.
If a loan is genuinely going to be overdrawn at year-end, plan for it deliberately — either arrange a formal repayment before the 9-month deadline, or budget for the Section 455 cash-flow cost rather than being caught by it unprepared.
Keep loans properly documented — amounts, dates, any interest charged. An undocumented running balance between director and company is exactly what an HMRC enquiry into director/company transactions looks for first.
This is general information, not personalised advice — tax treatment depends on your specific circumstances, and rates and thresholds shown here can change. Talk to us before acting on your own position.
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