Trust Ledger Accounting LtdDirector's Loan Account Explained: What Happens If It Is Overdrawn
By Trust Ledger Accounting. Rates checked against GOV.UK and HMRC guidance and last updated on .
A director's loan account records money you take from, or put into, your company that is not salary, dividends or expenses. If you owe the company money at its year end and do not repay it within 9 months, the company pays a temporary s455 tax charge of 35.75% on what is still owed (33.75% on loans made before 6 April 2026). If you owe it more than £10,000 at any point in the tax year, you may also pay tax on a benefit in kind.
The key numbers
| Rule | Figure |
|---|---|
| Repay without s455 tax | Within 9 months of the end of the accounting period |
| s455 rate, loans made from 6 April 2026 | 35.75% of the amount outstanding |
| s455 rate, loans made 6 April 2022 to 5 April 2026 | 33.75% |
| Benefit in kind applies | Loan over £10,000 at any time in the tax year |
| HMRC official interest rate | 3.75% from 6 April 2026 |
| "Bed and breakfasting" rule | Repay over £5,000 and re-borrow £5,000 or more within 30 days |
Sources: GOV.UK, if you owe your company money, if you lend your company money and HMRC official rates. The 35.75% rate follows the dividend tax rise from April 2026.
What counts as a director's loan
- Counts: personal spending paid from the business account, cash taken out "on account" before a dividend is declared, dividends paid when the company had no profits to cover them, money paid to a close family member.
- Does not count: salary through payroll, properly declared dividends, and refunds of business expenses you paid personally.
The most common way a small company director ends up overdrawn is taking regular "drawings" during the year and planning to sort out dividends later. If the profits are not there at the year end, the money becomes a loan.
A worked example
A company with a 31 March 2027 year end. The director takes £20,000 more than their salary and dividends during the year.
| What happens | Result |
|---|---|
| Repaid, or cleared with a dividend from available profits, by 31 December 2027 | No s455 tax |
| Still owed on 1 January 2028 | s455 of £7,150 (35.75% of £20,000), payable with the Corporation Tax |
| Loan repaid later | The £7,150 can be reclaimed, but only from 9 months and 1 day after the end of the period in which it was repaid |
| Over £10,000 owed during the tax year, no interest paid | Benefit in kind on interest at HMRC's official rate |
The s455 money is not lost, but it can sit with HMRC for well over a year, which hurts a small company's cash flow.
How to clear an overdrawn account
- Repay it from personal funds before the 9-month deadline.
- Declare a dividend to clear it, but only if the company has enough retained profit after Corporation Tax. A dividend without profits is unlawful and simply becomes another loan.
- Pay a bonus or extra salary through payroll, which is taxed as earnings.
- Charge interest at or above HMRC's official rate if the loan is over £10,000, to avoid a benefit in kind.
Do not repay just before the deadline and take the money straight back out. HMRC's 30-day rule is aimed at exactly that.
If the company owes you
If you have lent the company money, for example to get it started, the account is in credit. You can take that money back at any time with no tax to pay. If you charge the company interest, the interest is a business expense for the company and taxable income for you, and the company has to deduct 20% Income Tax and report it to HMRC on form CT61.
How we can help
Your director's loan account is included in our accounts fee. With every set of year-end accounts we reconcile it, show you exactly what you owe the company or what it owes you, and flag any s455 or benefit-in-kind risk before the deadline, while there is still time to fix it. Our company accounts and Corporation Tax return service is £299 + VAT, or included in our monthly packages from £69 + VAT a month.
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