Director's Loan Accounts: The Complete Guide to S455 Tax and HMRC Rules

A director's loan account that is overdrawn at the company's year end and not repaid within nine months and one day attracts Section 455 tax at 35.75% in 2026/27, charged on the company rather than the director. For many company directors, the director's loan account (DLA) starts as a convenient way to manage the flow of money between themselves and their company, then becomes a tax problem when it slips overdrawn without a clear plan to bring it back into credit. Blue Tick Accountants, a Guildford-based UK tax advisory and accountancy practice, helps directors manage this exact situation. This guide explains the mechanics in full: what a DLA is, when S455 applies, how the nine-month window operates, how to reclaim the tax once repayment is made, and what additional HMRC risks come with a poorly managed account.

Key Takeaways

• Section 455 tax is charged at 35.75% in 2026/27 on any director's loan account balance still overdrawn nine months and one day after the company's accounting year end.
• S455 is a company-level charge paid alongside corporation tax, not a personal tax on the director.
• A company with a 31 March 2026 year end must repay the overdrawn balance by 1 January 2027 to avoid S455 entirely.
• Bed and breakfasting rules disregard a repayment of £5,000 or more for S455 purposes if a new loan is taken from the same company within 30 days.
• An overdrawn loan exceeding £10,000 at any point in the tax year creates a benefit in kind unless interest is charged at HMRC's official rate, with Class 1A National Insurance at 13.8% due from the company.
• Reclaimed S455 is not refunded until nine months and one day after the end of the accounting period in which the loan is repaid, and only if a formal claim is made.

What Is a Director's Loan Account and How Does It Work?

A director's loan account is an internal record within a company's books that tracks all transactions between a director and the company that are not salary, dividends, or expense reimbursements. Every time a director takes money out of the company for personal use, the account goes down (becomes more overdrawn). Every time the director puts money in, pays back funds, or the company credits the account through salary or dividends, the balance increases.

At any given time, the DLA can be either in credit (the company owes the director money) or overdrawn (the director owes the company money). A DLA in credit is unproblematic from a tax perspective. An overdrawn DLA is where HMRC's rules come into play.

Directors are permitted to borrow from their company. The DLA mechanism is entirely legitimate. The tax consequences arise from how the loan is managed, specifically whether it is repaid in time and how the outstanding balance is disclosed.

When Does S455 Tax Apply to a Director's Loan?

S455 tax applies when a director's loan account remains overdrawn at the end of the company's accounting period and is not cleared within nine months and one day of that year end. S455 Corporation Tax Act 2010 is the charge HMRC levies in this situation.

The rate for 2026/27 is 35.75%, applied to the outstanding overdrawn balance at the accounting period end date. This rate aligns with the dividend upper rate and increased from 33.75% with effect from 6 April 2026. If a company's year ends on 31 March 2026, the nine-month window closes on 1 January 2027, and any balance still outstanding at that point attracts S455 at 35.75%.

S455 is a company-level charge, not a personal tax on the director. The company pays it alongside its corporation tax liability for the relevant accounting period. This distinction matters because it means the cash cost comes out of the company, which can affect cash flow planning and dividend capacity.

The charge does not apply to the whole history of the DLA, only to whatever balance was outstanding at the accounting period end date. If a director owes the company £40,000 at year end and repays £25,000 within the nine-month window, S455 applies only to the remaining £15,000.

How Does the Nine-Month Window and the Bed and Breakfasting Rule Work?

The nine months and one day after the accounting year end is the window within which a director can repay an overdrawn DLA and avoid the S455 charge entirely. For a company with a 31 December year end, the deadline is 1 October the following year. For a 31 March year end, it is 1 January.

Repaying the loan before this deadline is straightforward in principle: transfer the outstanding amount back to the company. In practice, the timing must be genuine. HMRC is alert to arrangements where a loan is repaid shortly before the deadline and then re-drawn from the company shortly afterwards. This approach, known as bed and breakfasting, is targeted by specific anti-avoidance rules.

Under the bed and breakfasting provisions, if a director repays £5,000 or more to clear a DLA and then takes out a new loan of any amount from the same company within 30 days, HMRC treats the repayment as not having been made for S455 purposes. The rule also applies where the director repays a loan and has, at the time of repayment, arrangements in place to take a further loan. The 30-day window runs from the date of repayment, not the date of withdrawal.

For larger loans over £15,000, there is a further rule: where the director borrows again within any period of 30 days that straddles the repayment, S455 applies to the lower of the repaid amount and the new borrowing. These rules mean that any repayment strategy needs to be straightforward and not circular if it is to be effective.

How Do You Repay an Overdrawn DLA and Reclaim S455 Tax?

Once S455 has been paid by the company, it is not lost permanently: HMRC allows the company to reclaim the tax once the loan is genuinely repaid in full, subject to a delay.

The reclaim is made on the corporation tax return for the accounting period in which the repayment falls, or alternatively by writing to HMRC directly using form L2P. However, the repayment of S455 is subject to a further time lag: the company cannot receive the refund until nine months and one day after the end of the accounting period in which the loan was repaid.

For example, if a company paid S455 in respect of a loan outstanding at 31 March 2026, and the director repays the loan in full on 15 October 2026 (within the company's accounting year ending 31 March 2027), the S455 reclaim can be submitted but the refund will not be issued until 1 January 2028 at the earliest. This delay can represent a meaningful cash flow cost, particularly where the S455 liability is large.

The reclaim process is administrative but it must be actively pursued. It does not happen automatically, and HMRC will not proactively issue the refund without a formal claim being made.

What Other Tax Risks Come With an Overdrawn Director's Loan?

Beyond S455, an overdrawn DLA can trigger a benefit in kind charge, a tax charge on any write-off, and additional close company scrutiny. The S455 charge is the most well-known consequence, but it is not the only one.

Beneficial loan benefit in kind. Where the outstanding balance of the loan exceeds £10,000 at any point during the tax year, HMRC treats it as a benefit in kind unless the company charges the director interest at HMRC's official rate. The benefit is the difference between the interest the director actually paid and what they would have paid at the official rate. This benefit must be reported on a P11D and is subject to Class 1A National Insurance contributions, payable by the company. For directors with large overdrawn accounts, the benefit in kind charge can add up quickly.

Writing off the loan. If the company writes off an overdrawn DLA rather than pursuing repayment, the written-off amount is treated as income in the hands of the director and taxed accordingly through PAYE and National Insurance. The company also loses the right to reclaim any S455 it has paid. Writing off a DLA is therefore a far more expensive solution than repayment, and HMRC treats it as such.

Close company implications. Most owner-managed limited companies are close companies for tax purposes. The rules governing close companies add additional scrutiny to transactions between the company and its participators (broadly, its shareholders and directors). Unexplained transfers, informal arrangements, and poorly documented loans can attract HMRC investigation, particularly where the company's accounts do not clearly reflect the DLA balance.

Worked Example: What Is the True Cost of an Overdrawn DLA?

The true cost of a £50,000 overdrawn DLA left unpaid is roughly £18,030 in additional tax, on top of the £50,000 itself. Consider a director whose company has a year end of 31 December. During the year, the director draws down £50,000 as a personal loan from the company, making the DLA overdrawn by £50,000 at year end. The nine-month deadline for repayment is 1 October the following year.

The director does not repay the loan in time. S455 is charged on the full £50,000 at 35.75%: a tax bill of £17,875 payable by the company alongside its corporation tax liability.

In addition, the £50,000 outstanding exceeds £10,000 throughout the tax year. Assuming an average balance of £50,000 and HMRC's official rate of 2.25%, the benefit in kind is £1,125. Class 1A National Insurance at 13.8% adds a further £155.

The director eventually repays the full £50,000 in March of the following year, which falls within the company's next accounting period (year ending 31 December). The S455 reclaim can be submitted, but HMRC will not refund the £17,875 until 1 October the year after that: a cash flow cost lasting up to two years from the original charge.

The total additional tax cost of the overdrawn DLA, including S455 and the employer NIC on the benefit in kind, is approximately £18,030. That is on top of the original £50,000 the director needed. A straightforward salary or dividend drawn through the normal payroll process would have been considerably cheaper.

How Should You Manage Your Director's Loan Account?

The most effective approach is to avoid building up an overdrawn DLA in the first place. This means ensuring that any amounts drawn from the company above salary and dividends are either expensed properly, formally documented as loans with a clear repayment plan, or avoided in favour of taking additional remuneration through the payroll.

Regular DLA reconciliation is essential. Directors should review the account balance against the company's accounting records at least quarterly, and before the year end in particular. Where the account is heading towards being overdrawn, the options are to vote a dividend (provided distributable profits exist), adjust salary, or ensure repayment before the nine-month deadline.

Documentation matters. Any loan from the company to a director should be recorded in board minutes, with the amount, date, and repayment terms noted. HMRC expects this level of formality, particularly in close company situations.

Where the DLA is already overdrawn and S455 is unavoidable, the priority is to minimise the balance at year end and to plan the reclaim process efficiently. Professional advice at this stage is worth the cost, because a poorly timed repayment or an inadvertent breach of the bed and breakfasting rules can make a manageable problem considerably worse.

Frequently Asked Questions

What is the S455 tax rate for 2026/27?

The S455 tax rate for 2026/27 is 35.75%. It is charged on any director's loan account balance still overdrawn nine months and one day after the company's accounting year end. The rate aligns with the dividend upper rate and increased from 33.75% with effect from 6 April 2026. The company, not the director, pays the charge.

Who pays S455 tax, the company or the director?

The company pays S455 tax, not the director. It is a company-level charge settled alongside the corporation tax liability for the relevant accounting period. Because the cash leaves the company, it affects cash flow planning and dividend capacity. This is distinct from any personal benefit in kind charge the director may also face on the same loan.

Can I avoid S455 by repaying my director's loan before year end?

Yes. If you repay an overdrawn director's loan within nine months and one day of the company's accounting year end, no S455 charge arises. For a 31 December year end the deadline is 1 October the following year. The repayment must be genuine, because bed and breakfasting rules disregard a repayment of £5,000 or more if a new loan is taken within 30 days.

How long does it take to reclaim S455 tax from HMRC?

Reclaimed S455 is not refunded until nine months and one day after the end of the accounting period in which the loan was repaid, and only if a formal claim is made. For a loan repaid on 15 October 2026 within a year ending 31 March 2027, the refund is not issued until 1 January 2028 at the earliest. HMRC does not issue refunds automatically.

Does an overdrawn director's loan create a benefit in kind?

Yes, where the outstanding balance exceeds £10,000 at any point during the tax year, unless the company charges interest at HMRC's official rate. The benefit is the difference between the interest paid and the interest due at the official rate. It must be reported on a P11D and attracts Class 1A National Insurance at 13.8%, payable by the company.

How Blue Tick Can Help

Blue Tick Accountants advises limited company owners on how to structure their remuneration efficiently, manage their director's loan account proactively, and handle any S455 position cleanly, including navigating the reclaim process with HMRC. An overdrawn director's loan account can trigger a cascade of tax charges that are entirely avoidable with the right planning. Head to our website and book a meeting now.

Conclusion

The director's loan account is a legitimate and useful tool for managing the relationship between a director and their company. Problems arise when it drifts overdrawn without a plan to correct it. A £50,000 overdrawn DLA that is not repaid in time will cost the company over £17,000 in S455 alone, before any benefit in kind exposure is added. That cash is recoverable, but only after a significant delay and only if the reclaim is actively pursued. Treat the DLA with the same discipline you would apply to any bank loan: monitor the balance, document the transactions, and repay well within the nine-month window.

About the Author

This guide was written by Leon, founder of Blue Tick Accountants, a Guildford-based UK tax advisory and accountancy practice that helps limited company owners and directors across the UK manage remuneration, director's loan accounts, and HMRC compliance. It was last reviewed for the 2026/27 tax year.

This article is intended for general informational purposes only and does not constitute tax, legal, or financial advice. Tax rules are subject to change and their application will depend on your individual circumstances. You should always seek advice from a qualified professional before taking action. Blue Tick Accountants accepts no liability for decisions made on the basis of this content.