We answer more of your Directors’ Loan Account questions

A Directors’ Loan Account (DLA) is a flexible tool for managing cash-flow for many directors. 

It’s a simple and cost-effective way to withdraw funds that aren’t salary, dividends or expense reimbursements. However, if these accounts are overdrawn (you owe the company money) and not managed precisely, they could become “a meticulously regulated debt instrument that can trigger significant tax bills for both the director and the company. 

Find out more here and how to avoid new taxation traps around overdrawn DLAs. 

The company’s tax hit: The Section 455 Charge

If you borrow money from your company and don’t repay it within nine months and one day of the company’s financial year-end, then the firm will face a penalty known as the Section 455 tax. 

  • 2026 Rate Increase: The Corporation Tax surcharge on overdrawn DLAs has increased to 35%. While this tax is refundable to the company once the loan is permanently repaid, it can represent a huge upfront hit to a business’s cash flow.
  • No Interest Refund: Crucially, if the S455 charge is paid late then HMRC will charge interest on it. Even if the loan is repaid later and the tax refunded, HMRC will never refund the interest charged on a late payment.

Your personal tax hit: Benefit in Kind (BiK)

If the DLA is overdrawn then HMRC would view the interest-free nature of the loan as a “perk” of employment and as such, would be taxed as a “benefit in kind”. 

  • New lower threshold: Previously loans under £10,000 were often ignored by HMRC. Now the reporting threshold has dropped by 50% so companies are required to report overdrawn DLAs exceeding £5,000 to HMRC.
  • Higher interest rates: The official HMRC interest rate used to calculate this benefit has risen to 3.75%. If you don’t pay interest to the company at this rate on balances over £5,000 then you would instead pay personal income tax and National Insurance Contributions on the “saved” interest instead.

The “Bed and Breakfasting” trap

To avoid paying the S455 tax, some directors used to repay the loan just before the nine-month deadline and immediately withdraw the funds again. HMRC has now closed this loophole.

  • The 30-day rule: If you repay a director’s loan and borrow new funds within 30 days then the repayment is ignored for tax relief purposes.
  • The arrangements rule: Even outside of the 30-day window, if there is a pre-existing plan to re-borrow the money, HMRC can invalidate the repayment.
  • Circular loans: New anti-avoidance rules (TAAR) target directors who move loans between associated companies to avoid the tax charge. If a loan is circulated to frustrate the charge then relief will be denied. 

DLA FAQs

Q: Can you just write off the loan?

A: Yes, but it’s expensive. If the company formally releases or writes off the debt, the loan amount is treated as a “distribution”. You’ll then be taxed on the full amount at dividend rates (which can be up to 39.35%) and you must also declare it on your personal Self-Assessment tax return. Furthermore, while the company can reclaim the S455 tax previously paid, it cannot claim the write-off as a tax-deductible business expense.

Q: What happens to my DLA if the company enters liquidation? 

A: The liquidator will demand that you repay it. When a business becomes insolvent, an overdrawn DLA is legally classified as a company asset. The liquidator then has a statutory duty to collect this debt to repay creditors. If unpaid, they can issue statutory demands, seek County Court Judgements (CCJs) and even pursue personal bankruptcy.

Q:  Can it be argued that the money was actually salary or dividends?

A: Generally, no. Courts have become very hot on clamping down on “retroactive reclassification”. In the recent case of Jones v The Sky Wheels Group, the court ruled that directors cannot simply recharacterise drawings as remuneration after the fact to avoid repaying a liquidator. If it was recorded as a loan to avoid PAYE/NICs at the time, then it will remain a loan in insolvency.

Q: Does the liquidator always ask you to pay tax?

A: Not necessarily, but the debt remains. In another recent case, Quillan v HMRC, a director avoided an immediate tax charge because the liquidator did not formally release the debt by deed, even though they weren’t actively pursuing it. However, this is a double-edged sword – because the debt wasn’t formally released, it wasn’t taxed, but it also wasn’t extinguished – meaning the legal liability remained with the director.

Q: How can I fix an overdrawn DLA before the financial year-end?

A: There are three main options:-

  • Repay it: Introduce the cash back into the company
  • Declare a dividend: If the company has sufficient distributable profits, you can declare a dividend to clear the balance. IMPORTANT – doing this when the company is insolvent is illegal and can be reversed by a liquidator
  • Bonus/salary: Directors can vote a bonus to clear the loan amount, ensuring that PAYE and NI are deducted

The era of treating a company bank account as a personal wallet or piggy bank is over. 

With the S455 rate at 35% and reporting thresholds dropping to £5,000, the cost of an overdrawn DLA is now higher than ever.

If possible, reconcile your DLA monthly and if you’re overdrawn then put a plan in place to clear it before the nine-month repayment deadline. 

An overdrawn DLA in liquidation is relatively easy to litigate but difficult to defend so if you’re worried about not being able to repay one, then get some impartial professional advice now before circumstances become more difficult.