A director's loan account records money you take from your company that is not salary, a dividend or an expense, and an overdrawn balance carries two separate tax costs. The first is a section 455 charge the company pays if the loan is still outstanding nine months and one day after the year end, now 35.75% for loans made from 6 April 2026. The second is a benefit in kind on the director where the loan exceeds £10,000. Both are avoidable with planning, and neither needs to catch you out.
This guide explains how the loan account works, what each charge costs, how the April 2026 rate rise affects loans that straddle the change, and how to keep the account clean so HMRC never has a reason to look twice.
Section 455 charge
Of the overdrawn balance still owed nine months and one day after the year end. Refundable once the loan is repaid.
Benefit in kind
An overdrawn loan above £10,000 is a taxable benefit unless you pay interest at HMRC's 3.75% official rate.
Key takeaways
- Two costs, not one. An overdrawn loan can trigger a company s455 charge and a personal benefit in kind.
- s455 is now 35.75%. That rate applies to loans made on or after 6 April 2026; older loans stay at 33.75%.
- Nine months and one day. Repay within that window after the year end and no s455 charge arises.
- The £10,000 line matters. Above it, the loan is a benefit in kind unless you pay interest at HMRC's 3.75% official rate.
- Write-offs are taxed. A loan written off is usually treated as a dividend for the director and is not deductible for the company.
Worried about an overdrawn loan account? Book a free 15-minute business call and we will tell you whether a charge is coming and how to deal with it cleanly.
Book a video call or a call back. We will tell you whether an s455 charge or a benefit in kind is coming, and set out the cleanest way to clear it in time.
The s455 charge on a £40,000 loan left outstanding. Repay in time and it never arises.
What is a director's loan account?
A director's loan account is the running record of money moving between you and your company outside the normal routes. You overdraw it by taking out more than you put in: drawings ahead of profit, personal costs paid by the company, or cash withdrawn that is not salary or a dividend. You can also lend money to your company, which puts the account in credit and is perfectly fine. The tax issue arises only when the account is overdrawn, meaning you owe the company.
Small, short-lived overdrafts are common and manageable. The problems start when a balance builds up and stays there across the year end, because that is when the section 455 charge and the benefit-in-kind rules both come into play.
How overdrawn accounts actually happen
In our experience it is almost never a deliberate loan. It is personal spending run through the company account, a little at a time, by a director who assumed it would be tidied up later. School fees. A personal legal bill. Costs on a property build. Personal tax paid from the business account. Then one larger one-off that felt affordable at the time.
By the year end those add up to a balance the director cannot repay from post-tax income, and the options have narrowed to two: leave it outstanding and the company pays 35.75% s455, or clear it with a dividend that is now taxed at the higher rate because the drawings have already pushed total income past £50,270. Either way it costs, which is why the dividend allowance and the loan account have to be looked at together rather than separately.
The fix is dull and it works. Your accountant should be comparing your dividend withdrawals against your loan account month by month, so the balance is visible while there is still time and room to declare a dividend inside the basic band. Directors who see that figure monthly rarely end up with an s455 charge at all.
"Was able to sort out my limited company accounts my previous accountant couldn't. From the first meeting they always kept me updated with what was going on."
Tony W., limited company client, Cardiff, March 2023The s455 charge and how to avoid it
Section 455 of the Corporation Tax Act 2010 charges the company when a close company lends to a participator, usually a director or shareholder, and the loan is still outstanding nine months and one day after the accounting period ends. For loans made on or after 6 April 2026 the rate is 35.75%, up from 33.75%, following the rise in the higher dividend rate at the Autumn 2025 Budget. The company pays it through the CT600A alongside its corporation tax return.
The charge is refundable. Once the loan is repaid, written off or released, the company reclaims it under section 458, though the refund only arrives nine months and one day after the end of the period in which the loan was cleared. Until then it is real cash sitting with HMRC. The simplest way to avoid all of this is to repay the overdrawn balance before the nine-month deadline, which removes the charge entirely.
Worked example: a £40,000 loan
Say your company has a 31 March 2027 year end and you take a £40,000 loan in May 2026. The deadline to repay without a charge is 1 January 2028, nine months and one day after the year end. Leave it outstanding past that date and the company pays s455 of £14,300, which is 35.75% of £40,000. Repay it later and the company eventually gets that £14,300 back, but it has been out of the business for over a year. The lesson is to plan the repayment, not the charge.
Illustrative for 2026/27. The s455 charge applies only if the loan is still outstanding nine months and one day after the year end, and is refundable once repaid. The benefit in kind applies where the overdrawn balance exceeds £10,000 and no interest is paid at the 3.75% official rate. Not a substitute for advice.
Loans that straddle the April 2026 rate change
Mixed-rate loan accounts are now common, and the order of repayment matters. Imagine a balance of £40,000 made up of £25,000 advanced before 6 April 2026 at 33.75% and £15,000 advanced after it at 35.75%. If you repay £27,000 and say nothing, HMRC generally applies the rule in Clayton's case and treats the oldest loan as repaid first, leaving the newer, higher-rate £15,000 outstanding. That produces a larger charge than if the newer loan had been cleared first. A short written note at the time, confirming which loan a repayment clears, can protect the better outcome. We keep this allocation right as part of preparing your corporation tax return.
The benefit-in-kind charge on loans over £10,000
Where an overdrawn loan exceeds £10,000 at any point in the tax year, it becomes an employment-related loan and a benefit in kind, unless you pay the company interest at HMRC's official rate of 3.75% for 2026/27. The taxable benefit is the difference between that official rate and the interest you actually pay, reported on form P11D, with the company paying Class 1A National Insurance at 15% on it.
Take a director with a £20,000 overdrawn loan for a full year who pays no interest. The benefit is £20,000 at 3.75%, which is £750. A higher-rate director pays income tax of £300 on that, and the company pays Class 1A NI of around £113. Paying the company interest at the official rate removes the charge, and that interest is income for the company, so we often set up a small interest charge rather than leave the benefit in kind running.
Anti-avoidance: bed and breakfasting
HMRC blocks the old trick of repaying a loan just before the deadline and taking it straight back out. Two rules apply. Under the 30-day rule, a repayment of £5,000 or more is ignored if a new loan of a similar size is taken within 30 days. Under the arrangements rule, where the balance is £15,000 or more and there is an intention to redraw, the repayment is disregarded regardless of timing. Genuine repayments funded from real income, such as a properly declared dividend or bonus, are not caught.
Writing off a director's loan
Writing the loan off is possible but rarely a clean fix. For a director who is also a shareholder, the written-off amount is usually treated as a distribution and taxed at dividend rates on the director, so in 2026/27 that means 10.75%, 35.75% or 39.35% depending on your band. The company cannot deduct the write-off against its corporation tax, and there can be National Insurance exposure too. A write-off needs proper authorisation and advice, because the tax treatment depends on the exact facts.
How to keep your loan account clean
Accurate, current records make all of this straightforward, which is why we run client accounts in Xero with ongoing bookkeeping, so an overdrawn balance is visible long before it becomes a charge.
Is an s455 charge heading your way?
Five short questions on your loan account. At the end you will get an honest read on whether you are in the clear or a charge could be building. Either way, the next step is a free 15-minute call.
The loan account is one piece of it. See how we plan the books, the reporting and the tax for directors across the whole year.
Related reading for directors
Salary versus dividends for directors
Pay yourself on a planned split so drawings never build into a loan.
Read the article → Director payThe dividend allowance explained
How the £500 allowance and the new rates interact with your loan account.
Read the article → ComplianceBenefits in kind for directors
Where a cheap loan becomes a P11D benefit, and the other perks that are taxed.
Read the article →Frequently asked questions
How much is the s455 tax on a director's loan?
It is 35.75% of the outstanding balance for loans made on or after 6 April 2026, and 33.75% for loans made between April 2022 and April 2026. The company pays it if the loan is still owed nine months and one day after the year end, and reclaims it once the loan is repaid.
Can I avoid the s455 charge?
Yes, by repaying the overdrawn balance within nine months and one day of the year end. Repaying from genuine income such as a declared dividend works; repaying then immediately redrawing the same money does not, because of the anti-avoidance rules.
When does a director's loan become a benefit in kind?
When the overdrawn balance exceeds £10,000 at any point in the tax year and you pay no interest, or interest below HMRC's official rate of 3.75%. The benefit goes on a P11D and the company pays Class 1A National Insurance on it.
Is s455 tax refundable?
Yes. Once the loan is repaid, written off or released, the company reclaims the charge under section 458. The refund is paid nine months and one day after the end of the accounting period in which the loan was cleared, so timing affects cash flow.
What happens if my company writes off my loan?
For a director-shareholder it is usually taxed as a dividend on you at dividend rates, the company gets no corporation tax deduction, and National Insurance can apply. Take advice before writing one off, as the treatment depends on the facts.
Get your loan account handled properly
Total Books Accountants Ltd is a regulated, founder-led practice of limited company accountants, led by Buhir Rafiq with more than 30 years in accounting and finance. We are AAT licensed, an HMRC registered tax agent, a Companies House authorised agent and a Xero Certified Advisor, working from offices in Cardiff, Newport and Bristol and UK-wide through our Virtual Finance Office with secure digital onboarding.
If your loan account is overdrawn, or you are not sure, book a free 15-minute business call and we will set out the cleanest way to deal with it.
This guide is general information, not advice for your specific situation. Tax rules change and the treatment of a loan depends on your circumstances. Completing your returns remains the responsibility of the taxpayer; please take professional advice before acting.
