Director's loan account explained: s455 tax (35.75% from April 2026), beneficial loan benefit-in-kind, and how to clear a DLA safely

What a Director's Loan Account actually is

Every UK limited company has a Director's Loan Account (DLA) for each director, whether the directors realise it or not. The DLA is a ledger that records all money flowing between the director and the company that is not salary, dividend, or genuine expense reimbursement.

Common entries that hit the DLA:

• Cash withdrawn from the company bank account without coding to salary or dividend
• Personal items paid for on the company card
• Company costs paid for from the director's personal account
• Money the director puts into the company to fund early cash flow
• Cars, holidays, school fees billed through the company in error

The DLA can sit in one of two states:

• Overdrawn (director owes the company) triggers tax issues if not handled correctly
• In credit (company owes the director) is completely tax-neutral and represents a long-term tax-free extraction route the director can draw on at any time

The £10,000 beneficial loan rule

If the overdrawn DLA balance exceeds £10,000 at any point during the tax year, HMRC treats it as a beneficial loan and a benefit-in-kind charge arises on the director personally.

The taxable benefit is the difference between:

• The interest the director would have paid at HMRC's official rate (3.75% for 2026/27)
• The interest actually paid to the company

So a £30,000 loan outstanding for a full year, with no interest charged to the director, produces a taxable benefit of £30,000 × 3.75% = £1,125. At higher-rate tax, that costs the director £450. Plus the company pays employer Class 1A NI at 15% on the £1,125 benefit = £169.

Two ways to avoid the BIK:

1. Keep the loan below £10,000 at all times during the tax year
2. Charge interest to the director at or above the official rate, so there's no 'beneficial' element

HMRC reviews the official rate quarterly from April 2025, so the 3.75% figure can move. We monitor this and adjust client calculations through the year.

The s455 charge, the bigger tax issue

Section 455 of the Corporation Tax Act 2010 is the headline DLA risk for most owner-managed companies. The rule:

If a loan to a participator (the director, in practice) is still outstanding 9 months and 1 day after the company's accounting period end, the company pays Corporation Tax on the outstanding amount at the s455 rate.

The 2026 rate change

The s455 rate is aligned by legislation to the higher dividend tax rate:

• Loans made before 6 April 2026: 33.75%
• Loans made on or after 6 April 2026: 35.75%

A £50,000 DLA balance unpaid 9 months after the year-end attracts s455 of £18,875 in the post-April-2026 regime (versus £16,875 in the old regime). It is paid alongside the normal corporation tax bill on the CT600.

Worked example: a typical director's mistake

Year-end 31 March 2027. The director has been drawing £4,000 a month from the company through the year, coded to the DLA instead of being declared as salary or dividend. By 31 March the DLA is overdrawn by £48,000.

Consequences:

• Beneficial loan BIK for 2026/27 on the running average loan balance. Approx £24,000 average × 3.75% = £900 taxable benefit. At higher-rate income tax, personal tax cost ~£360.
• Employer Class 1A NI on the £900 = £135
• s455 deadline: 1 January 2028 (9 months and 1 day after 31 March 2027 year-end). If unpaid, company owes s455 at 35.75% × £48,000 = £17,160

The fix, done in time:

1. Declare a dividend from distributable reserves of £48,000 to clear the DLA before 1 January 2028 (assuming reserves are available)
2. Personal dividend tax on the £48,000: at higher-rate dividend rate 35.75%, less the £500 allowance, around £16,952 of personal tax
3. Pay the BIK income tax on the average loan period

The dividend route costs the same in personal tax as if the income had been declared as dividend in the first place, which is why the cleaner approach is always to declare a dividend at the point of extraction, not to let it accumulate in the DLA.

How to reclaim s455 (and the 9-month wait)

s455 tax is repayable once the loan has been repaid. The mechanism is form L2P (Loans to Participators) submitted to HMRC. But there's a catch: HMRC only refunds the s455 tax 9 months and 1 day after the end of the accounting period in which the loan was repaid.

So if you take out a £30,000 loan in your year ended 31 March 2027, pay £8,475 s455 (at 33.75% old rate, since loan was pre-April 2026), and repay the loan in May 2027, you can reclaim the £8,475 from 1 January 2029 (9 months and 1 day after the 31 March 2028 year-end). That's a 20-month wait for the cash refund.

The practical implication: s455 is a real cash cost to the company in the meantime, even though it is technically a deposit with HMRC.

The bed-and-breakfast anti-avoidance rule

HMRC has seen every variation of 'repay just before the deadline and re-draw the next day' that owner-managers have attempted. Two anti-avoidance rules are now hard-baked into the s455 regime:

1. The 30-day rule. A repayment matched by a re-draw of the same or similar amount within 30 days is ignored for s455 purposes. The original loan is treated as still outstanding.
2. The £15,000+ rule. For loans of £15,000 or more, even repayments outside the 30-day window can be disallowed if HMRC can show there was an arrangement or intention to re-borrow. This is harder to evidence but the rule exists for cases where the 30-day rule alone would not bite.

The clean way to clear a DLA is a real repayment from the director's personal funds (often by declaring and physically paying a dividend from the company that the director then uses to pay back the DLA, the loan-and-dividend are recorded separately even though the cash may net off).

What if the company writes off the DLA?

Some directors think a write-off is a clean exit from the s455 problem. It is not, for two reasons:

1. The director is taxed on the write-off as a dividend. The forgiven amount is treated as a distribution in the director's hands, taxed at 10.75% / 35.75% / 39.35% for 2026/27, less the £500 dividend allowance.
2. The company gets no deduction. The write-off is not allowable against corporation tax. So the underlying cash has been taxed once at the company level (CT) and once at the director level (dividend tax).

Compared to a proper repayment-via-declared-dividend route, write-off is the same personal tax for the director, plus the additional risk of HMRC challenging the substance of the write-off as a disguised remuneration arrangement. In almost every case we see, a clean repayment is better.

When DLAs become commercially serious

• Mortgage applications. Lenders increasingly look at directors' loans. A persistent overdrawn DLA can reduce affordability or trigger requests for explanation.
• Sale of the company. A buyer will require DLAs to be cleared as a completion condition. Last-minute clean-ups can force suboptimal dividend declarations against insufficient reserves.
• Insolvency. If the company goes into liquidation while the director's DLA is overdrawn, the liquidator pursues the director personally for the outstanding amount. This is one of the most common causes of personal financial difficulty for failed company directors.
• HMRC enquiry. Persistently large or unexplained DLAs are an HMRC enquiry flag. Once an enquiry opens, the substance of every loan and repayment comes under scrutiny.

Three habits that keep DLAs clean

1. Reconcile monthly. Most DLA problems start because no one looks at the balance until year-end. Five minutes a month catches issues before they compound.
2. Separate personal and company cards. The single biggest source of accidental DLA entries is using the company card for personal expenses 'just this once'. Use separate cards and code consistently.
3. Declare dividends quarterly, not annually. If you're drawing money regularly from the company, formalise it with a quarterly dividend declaration (board minute, voucher, payment). The DLA stays clean and the dividend timing helps with personal tax planning.