Managing an overdrawn Director’s Loan Account (DLA) has changed significantly over the past few years. 

The Autumn Budgets of 2024 and 2025 along with recent legal cases have meant that the fiscal tightening around DLAs have made them a primary target for HMRC. 

If your company is facing liquidation then an overdrawn DLA is no longer just a bookkeeping issue; it’s a personal liability that can threaten your private assets if not dealt with correctly. 

Here’s everything you need to know about the regulations and risks governing DLAs in 2026. 

A Stricter Tax Environment

The tax rules surrounding overdrawn Director’s Loan Accounts (DLAs) can create significant financial consequences for both companies and their directors. Changes introduced in April 2026 have increased the potential tax cost, making it particularly important to understand the reporting requirements and repayment deadlines.

Increased Section 455 Tax Rate

From 6 April 2026, the Section 455 Corporation Tax rate on qualifying loans made by close companies to their shareholders or other participators increased from 33.75% to 35.75%.

This charge generally applies where a qualifying loan remains outstanding nine months and one day after the end of the company’s Corporation Tax accounting period.

For example, a qualifying £20,000 loan made after 5 April 2026 could result in a £7,150 Section 455 tax charge if it remains outstanding beyond the relevant repayment deadline.

Although the company can generally reclaim the tax when the loan is subsequently repaid, released or written off, the repayment of the tax is subject to statutory timing rules. This can create considerable cash flow pressure for businesses already experiencing financial difficulties.

Director’s Loan Account Reporting Requirements

Where the relevant reporting requirements apply, there is no minimum monetary threshold for declaring an outstanding director’s loan on the company’s Corporation Tax Return using the CT600A supplementary pages.

A qualifying loan outstanding at the company’s accounting year-end must generally be reported, even if it is subsequently repaid within nine months and no Section 455 tax ultimately becomes payable.

A £5,000 threshold has been introduced in the HMRC guidance relating to specific anti-avoidance provisions concerning loans that are repaid and replaced, known as Bed and Breakfasting.

Benefit-in-Kind Tax on Interest-Free Loans

Directors may also face personal tax consequences where they receive interest-free or low-interest loans from their company.

Under HMRC’s beneficial loan rules, a taxable benefit can generally arise where the total outstanding balance of relevant loans exceeds £10,000 at any point during the tax year, and the interest charged is below HMRC’s official rate.

Where a taxable benefit arises, the company may need to report it through the appropriate employment benefits reporting process and pay Class 1A National Insurance contributions. The director may also have a personal Income Tax liability.

These benefit-in-kind rules are separate from the Section 455 Corporation Tax charge, meaning that both sets of tax consequences may need to be considered.

For directors, the key message is simple: keep accurate loan account records, understand the applicable tax rules and seek professional advice before allowing an overdrawn balance to increase or remain unpaid.

The DLA as a Company Asset

When a company goes into liquidation, any overdrawn DLAs are legally classified as company assets.

The statutory legal duty of a liquidator is to realise as much as they can from assets to repay creditors. Consequently, you will be pursued for the repayment of an outstanding DLA. This could include issuing statutory demands; County Court Judgements (CCJs); charges on personal property possibly leading up to bankruptcy proceedings if the debt exceeds £5,000.

The “Reclassification” Trap

A common defence in 2026 involves directors attempting to claim that money withdrawn from the business was in the form of salary or dividends, not a loan. Some recent legal cases have provided precedents that have made this defence difficult to implement from now on. 

  • Retrospective Reclassification Fails: Courts have held (notably in Jones v The Sky Wheels Group) that directors cannot simply recharacterise drawings as remuneration after the fact. If withdrawals are originally recorded as a loan to avoid PAYE and NICs, then they cannot later be claimed as salary to avoid repaying the liquidator.
  • Illegal Dividends: If directors attempt to clear a DLA by declaring a dividend when the company is insolvent (or lacks distributable profits), the dividend is viewed as unlawful. The liquidator will reverse this transaction and demand you repay the illegal dividend personally. 

Tax Consequences of a “Write-Off”

If a company decides to write off an overdrawn Director’s Loan Account (DLA), this does not mean the director can simply walk away from the debt without tax consequences.

Where a loan made by a close company to a director who is also a shareholder is formally released or written off, the amount written off will generally be treated as taxable income for the director under Section 415 of the Income Tax (Trading and Other Income) Act 2005.

The director will normally need to declare the amount on their Self Assessment tax return, with Income Tax calculated under the applicable rules for dividend income.

There may also be National Insurance implications. Where the director is an employee and the amount written off constitutes earnings from their employment, Class 1 National Insurance contributions may be payable by both the company and the director.

What happens to the company’s Corporation Tax?

Where the company has paid Section 455 Corporation Tax on an outstanding director’s loan, it can generally claim relief when the loan is subsequently repaid, released or written off.

However, the timing of that relief is important. If the loan is written off more than nine months after the end of the accounting period in which it was made, the company must normally wait until nine months and one day after the end of the accounting period in which the write-off occurred before the relief becomes due.

Any interest already paid on the Section 455 tax is not recoverable.

What if the company enters liquidation?

An overdrawn Director’s Loan Account remains an asset of the company and does not automatically disappear when the company enters liquidation.

A liquidator may seek repayment from the director to recover funds for creditors. If the outstanding balance is subsequently released or written off, the director may still face Income Tax and National Insurance liabilities.

Directors should therefore not assume that liquidation will remove their obligation to repay an overdrawn loan account.

The key point: Writing off a Director’s Loan Account is not a tax-free solution. It can create personal tax liabilities for the director and National Insurance obligations for the company. Professional advice should always be sought before agreeing to a write-off, particularly where the business is experiencing financial difficulties.

Mitigation – Negotiation is possible

Having an overdrawn DLA in liquidation might seem like an insurmountable obstacle at the time, liquidators are pragmatic and bound to return the best value to creditors. As a result, you might be able to negotiate a settlement lower than the total debt. 

  • Statement of Means: By providing the liquidator with a “Statement of Means” detailing your assets, income and liabilities, you can prove your inability to pay the full amount.
  • Commercial Settlements: Liquidators may accept a reduced lump sum to avoid the costs of litigation. There are documented cases when DLAs have been settled for significantly less than the face value, especially when the director evidenced limited means.

A Directors’ Loan Account is a bit like a parachute. Used correctly during regular solvent trading, it provides flexibility and utility. But if the plan enters the turbulence of insolvency then a poorly packed parachute – one that is overdrawn, undocumented or retroactively altered – will not just fail to save you but will actively drag you down into further financial peril. 

An overdrawn Director’s Loan Account is more than a bookkeeping issue. With higher Section 455 tax rates and potentially significant personal tax consequences, directors should understand their obligations and address outstanding balances before financial difficulties escalate.

So if you are worried about an overdrawn Director’s Loan Account, get in touch for a free initial conversation. 

We’ll talk you through all the options available to you and what your next steps should be to protect your personal finances and those of your business.