The director's loan account, or DLA, is one of the most misunderstood areas of running a limited company — and one of the easiest ways for a contractor to land an unexpected tax bill. The concept is simple enough: it's a record of all the money that flows between you and your company that isn't salary, dividend, expense reimbursement, or repayment of money you originally lent in. The problems start when that account drifts into the red and stays there past your year-end.
This guide explains what an overdrawn DLA actually triggers, the two separate tax charges involved, the anti-avoidance rules designed to stop you gaming the year-end date, and the practical options for clearing a loan cleanly.
What is a director's loan account?
Your DLA is a running balance of what you owe the company, or what the company owes you. It moves in both directions:
- The company owes you (the account is in credit) when you've put your own money in — paying a supplier from your personal card, lending the company start-up cash, or incurring business expenses you haven't yet reclaimed.
- You owe the company (the account is overdrawn) when you've taken money out that isn't salary, a properly declared dividend, or an expense repayment — for example, drawing cash mid-year in anticipation of dividends you haven't formally voted yet.
A credit balance is no problem at all — you can draw it back tax-free whenever you like, and the company can even pay you interest on it. An overdrawn balance is where the tax consequences live.
Paying yourself interest on a credit balance is legitimate and can be useful — it's deductible for the company and taxed on you as savings income, where your personal savings allowance may cover it. But it is yearly interest paid to an individual, so the company must deduct 20% income tax at source and report it to HMRC quarterly on form CT61, paying over the tax withheld. You then claim credit for that tax on your own return. Most one-director companies that start paying interest are unaware of the CT61 obligation until it is late, so decide deliberately rather than drifting into it.
The classic trap is drawing regular monthly amounts as "dividends" without actually declaring them properly — no board minute, no dividend voucher, or worse, no distributable profit to cover them. A dividend paid without sufficient post-tax retained profits is legally unlawful, and HMRC can reclassify it as a director's loan instead. Either way, you can find yourself overdrawn without ever having thought of it as borrowing from the company — and if that reclassified loan isn't repaid within nine months and one day of year-end, it triggers the same S455 charge as any other overdrawn balance.
Charge one: the S455 tax charge
If your director's loan account is overdrawn at your company's accounting year-end, and you don't repay it within nine months and one day of that year-end, the company must pay a tax charge under section 455 of the Corporation Tax Act 2010. The rate is set to match the higher dividend rate, so there's no advantage in taking a loan instead of a dividend — and because the dividend rate rose in April 2026, the rate now depends on when each advance was made rather than which tax year you are in. See the callout below before you calculate anything.
The S455 rate tracks the higher dividend rate automatically. Following the Autumn Budget 2025 dividend rate rise, loans advanced on or after 6 April 2026 are charged at 35.75%; loans advanced before that date remain subject to the previous 33.75% rate. Check which period your loan falls into before calculating the charge.
S455 is not a director's rule — it applies where a close company lends to a participator (broadly a shareholder) or an associate of one. Two consequences that matter for contractor companies:
- If your spouse holds shares and draws money that isn't salary, a properly declared dividend or an expense repayment, that creates an S455 exposure too — even though she is not a director. If you have set up a spouse shareholding for the reasons in our salary vs dividends guide, her drawings need the same discipline as yours.
- Associates include close family, so a loan to an adult child of a shareholder can be caught as well.
- Conversely, a director who holds no shares and is not an associate of a participator falls outside S455 — though the benefit-in-kind charge below still applies to them.
The key date is nine months and one day after your year-end — the same day your corporation tax is due. If the loan is cleared by then, no S455 is payable. If it isn't, the company pays the charge on whatever remains outstanding, and because S455 falls due at the same time as corporation tax, late payment carries interest on top.
One point that reduces the paperwork: where a loan is made and repaid within the same accounting period, so that nothing is outstanding at the period end, HMRC's guidance confirms the loan and repayment do not need to be reported on the company's tax return and the claim for relief is implicit. The exception is where the repayment was only temporary and forms part of a bed and breakfasting arrangement, in which case the loan is treated as still outstanding. For the contractor who dips overdrawn between dividend declarations and clears it properly before year-end, there is genuinely nothing to report.
This is a corporation tax charge on the company, not a personal tax charge on the director. The liability goes into the company's CT600, with the loan and repayment detail on the CT600A supplementary page. That matters because it's the company's cash that's tied up — and for a contractor whose company is essentially their own money, that's still your money locked away with HMRC.
The good news: S455 is refundable
S455 is not a permanent tax — it's effectively a deposit. Once you repay the loan (or write it off, or clear it with a dividend or bonus), the company can reclaim the S455 paid on that amount under section 458. The claim goes on the CT600A where the return is still open, or separately on form L2P where it is not. The catch is the timing: you can only reclaim it nine months and one day after the end of the accounting period in which the loan was repaid. So if you pay the S455 and then clear the loan a few months later, you could be waiting well over a year to get the cash back.
The s458 claim is not automatic and it is not open indefinitely. It must be made within four years of the end of the financial year in which the loan was repaid, released or written off. Miss that deadline and the S455 — which was only ever a deposit — becomes permanently lost to the company. This is the single most common way contractors end up out of pocket on a loan they did in fact repay.
Read "financial year" carefully: for corporation tax it means the year beginning 1 April, not your company's accounting period. So a loan repaid in February 2028 sits in the financial year ending 31 March 2028, and the claim deadline is 31 March 2032. Getting this wrong in the company's favour is harmless; getting it wrong the other way costs you the whole deposit.
| Event | Timing |
|---|---|
| Company year-end — DLA overdrawn £40,000 | 31 March 2027 |
| S455 paid (35.75% × £40,000 = £14,300) | 1 January 2028 — 9 months and 1 day after year-end |
| Loan repaid in full — option A | February 2028, inside the year to 31 March 2028 |
| Reclaim available under option A | 1 January 2029 — cash back after 1 year |
| Loan repaid in full — option B | May 2028, inside the year to 31 March 2029 |
| Reclaim available under option B | 1 January 2030 — cash back after 2 years |
The example assumes a 31 March year-end and a balance overdrawn at 31 March 2027. Look at what separates the two options: three months of timing doubles how long £14,300 sits with HMRC. Because the clock runs from the end of the accounting period in which repayment falls, repaying before your period end rather than just after is worth a full year of cash flow. That is the single most useful thing to know about S455, and it is entirely within your control.
Either way this is a cash-flow drag rather than a permanent loss — provided you actually make the claim within the four-year window above.
Charge two: the benefit-in-kind on loans over £10,000
The S455 charge is about the year-end balance. The benefit-in-kind (BIK) charge is about the loan existing at all during the year. If the balance exceeds £10,000 at any point in the tax year, and you aren't paying the company interest at HMRC's official rate, the difference is treated as a taxable benefit — a cheap or interest-free loan. Note that the £10,000 test looks at the total of all employment-related loans from the company, not the DLA in isolation, so anything else outstanding counts towards it.
HMRC's official rate of interest is 3.75% from 6 April 2026, unchanged from 2025/26 and confirmed in HMRC's published table of actual official rates. Since April 2025 HMRC reviews the rate quarterly rather than fixing it for the year, and any in-year change takes effect on 6 July, 6 October or 6 January — so check the published rate before you calculate, particularly late in the year.
The benefit is the interest that would have been charged at the official rate, less any interest you actually paid. There are two ways to work it out. The averaging method takes the opening and closing balances, averages them, and applies the average official rate — simple, and what the example below uses. The precise method works on the actual balance day by day, and either you or HMRC can insist on it. Where a balance moves sharply during the year the two give materially different answers, so it is worth knowing which one you are using. One practical wrinkle: HMRC's average official rate table only publishes a figure once a year has ended, so for a current-year calculation you work from the actual rate.
Does the benefit-in-kind charge apply to you?
Did the loan exceed £10,000 at any point in the year? If the balance never went above £10,000, there's no BIK charge at all. If it touched £10,001 even briefly, the charge can apply to the whole period the loan was outstanding.
Did you pay the company interest at the official rate or higher? If yes, there's no benefit — you've paid for the loan commercially. If you paid less (including nothing), the shortfall is the taxable benefit.
Report and pay. The benefit goes on a form P11D, with the company's Class 1A reported on a P11D(b). Both are due by 6 July following the end of the tax year, and the Class 1A is payable by 22 July (19 July if you pay by post). You pay income tax on the benefit at your marginal rate; the company pays Class 1A National Insurance on the same figure, at 15% since 6 April 2025.
Worked example: a director has an interest-free loan averaging £30,000 across the year. At the 2026/27 official rate of 3.75%, the deemed benefit is £1,125. A higher-rate director pays 40% income tax on that (£450), and the company pays 15% Class 1A NIC (£168.75). Modest figures — but entirely avoidable, and the reporting obligation is easy to forget.
You may have heard that the P11D is being abolished. It is, for most benefits — mandatory payrolling of benefits in kind starts on 6 April 2027, phased in, replacing annual P11D reporting with real-time reporting through payroll. But beneficial loans and living accommodation are carved out of the mandatory regime, and the P11D and P11D(b) process is being retained for those two categories. A separate voluntary registration service for payrolling loans is expected to open in November 2026 for those who want it. So for an overdrawn director's loan, the reporting route described above continues to apply. P11Ds are still required for 2026/27 in the normal way.
If you keep the loan below £10,000 throughout the year, the benefit-in-kind charge never arises — and S455 still won't apply if you clear it within the nine-month window. For most contractors who only drift overdrawn briefly between dividend declarations, staying under £10,000 is the cleanest approach. Alternatively, having the company charge you interest at the official rate removes the benefit, and that interest becomes taxable income for the company.
The anti-avoidance rules: bed and breakfasting
The obvious wheeze is to repay the loan just before year-end (to avoid S455) and then draw it straight back out again a few days later. HMRC closed this down years ago with two anti-avoidance rules collectively known as "bed and breakfasting."
- The 30-day rule: if £5,000 or more is repaid and then £5,000 or more is redrawn within 30 days, the repayment is matched against the new drawing and effectively ignored — S455 still applies to the original loan.
- The "intentions and arrangements" rule: even outside 30 days, if the balance was £15,000 or more and at the time of repayment there were arrangements or an intention to draw £5,000 or more again, the repayment is disregarded. There is no time limit on this one, which is what catches longer-cycle versions of the same trick.
The practical takeaway: a repayment only counts if it's a genuine, permanent reduction in what you owe — not a round-trip designed to dodge the year-end snapshot.
There is one carve-out worth knowing, because it is why the standard fix works. These rules bite on cash round-trips; they do not catch repayments that themselves carry an income tax charge on you. Clearing the loan by voting a dividend or a bonus and offsetting it against the balance is not a bed-and-breakfast repayment, because you are paying personal tax on the amount used to clear it — there is nothing for the anti-avoidance rules to counteract. So the dividend-offset route below is safe by design, not merely by looking genuine.
How to clear an overdrawn director's loan
There are four legitimate ways to bring an overdrawn DLA back to zero. The right one depends on your profits, your other income, and your timing.
| Method | How it works | Watch out for |
|---|---|---|
| Repay in cash | Pay personal money back into the company before the nine-month deadline. | The bed-and-breakfasting rules if you plan to redraw. |
| Declare a dividend | Vote a dividend and offset it against the loan rather than paying cash. | Needs sufficient distributable profit; you pay personal dividend tax. |
| Vote a bonus / salary | Clear the loan with additional employment income. | Income tax plus employee and employer NIC — usually the most expensive route. |
| Write off the loan | The company formally releases the debt. | Taxed on you as a distribution, NIC may apply, and the company gets no corporation tax deduction. Usually the worst option. |
For most contractors with profits available, offsetting the loan against a dividend is the cleanest solution: it clears the S455 exposure and the dividend tax is usually lower than the NIC cost of a bonus. The dividend must be properly declared, with distributable reserves to support it — otherwise you've simply swapped one problem for another.
It's tempting to think a company can just write off a director's loan and make the problem disappear. It can't, tax-free. A written-off loan to a director who is also a shareholder is generally taxed on the individual as a distribution — so as dividend income — and HMRC may also seek National Insurance on it.
The point that usually settles it: the company generally gets no corporation tax deduction for the amount written off. So the write-off costs you personal tax, may cost NIC, and buys the company nothing beyond the S455 refund it could have had by any other route. It is almost never the efficient option it first appears, and it is worth taking advice before going down this road rather than after.
Practical habits that keep a DLA clean
- Declare dividends properly and in advance of drawing them — board minute and dividend voucher dated before the money leaves the account. This stops drawings being reclassified as a loan.
- Check distributable reserves before every dividend — a dividend paid without sufficient profit is unlawful and can be reclassified as a loan, recreating the S455 problem.
- Keep the balance under £10,000 if you can, to avoid the benefit-in-kind charge entirely.
- Reconcile the DLA monthly in your bookkeeping software rather than discovering an overdrawn balance at year-end when your options have narrowed.
- Mind the nine-month deadline — it's the same date as your corporation tax payment, so build the DLA review into your year-end routine.
- If S455 has already been paid, repay before your next period end rather than just after — as the table above shows, three months of timing decides whether you wait one year or two for the refund.
- Remember it follows you out of the company — an overdrawn DLA is an asset of the company, so it has to be cleared before a strike-off and a liquidator will pursue it in an MVL. It is one of the most common things that complicates closing a company down, so deal with it well before you get there. See our guide to closing your company.
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