If you run your own limited company, it’s easy to treat the business bank account as an extension of your own – especially when cash is tight and a dividend hasn’t been declared yet. A director’s loan account simply records the money moving between you and the company that isn’t salary, dividend, or an expense repayment. Most of the time it’s harmless bookkeeping. The trouble starts when the account is overdrawn – meaning the company owes you nothing and you owe the company money – and stays that way for too long.
From 6 April 2026, the tax charge on an overdrawn loan account left unpaid, known as the Section 455 charge, rose from 33.75% to 35.75%. For a director sitting on a £40,000 overdrawn balance from before the summer, that’s a meaningful difference between what was budgeted for and what’s now due. This piece sets out what triggers the charge, how it’s paid and reclaimed, and the practical steps that stop it becoming a recurring cost – written for the directors of owner-managed companies across Manchester, Liverpool, and the wider North West who are weighing this up against trading as a sole trader.
What a director’s loan account actually is
Every transaction between a director and their company that isn’t pay, dividend, or expenses gets recorded in the director’s loan account (DLA). Take money out beyond what you’re owed, and the account goes overdrawn – you owe the company. Put money in, and it goes into credit – the company owes you, interest-free, with no tax consequence.
The DLA exists because HMRC treats a company and its director-shareholders as related parties who could otherwise time or structure payments purely for tax advantage. Left unchecked, an overdrawn account is effectively an interest-free loan a director could keep rolling forward indefinitely rather than declaring a dividend and paying tax on it – which is exactly what the Section 455 rules exist to prevent.
What triggers the Section 455 charge
The mechanics are straightforward, even if the terminology sounds intimidating. Under Section 455 of the Corporation Tax Act 2010, if a director’s loan account is still overdrawn nine months and one day after the company’s accounting year-end – the same date corporation tax falls due – the company must pay tax on the outstanding balance. It’s paid by the company, not the director personally, reported on the CT600A supplementary page alongside the corporation tax return.
A plain-English example:
a Liverpool-based design agency has a year-end of 31 March. Its sole director draws £18,000 from the company during the year to cover a house deposit shortfall, on top of salary and dividends already taken. Come 31 March, the loan account is £18,000 overdrawn. The company has until 1 January the following year – nine months and one day after the year-end – to either have the director repay it, declare a dividend to clear it, or accept a Section 455 bill on whatever’s left outstanding.
If the balance is repaid in full before that date, no charge arises at all. If £10,000 is repaid and £8,000 remains outstanding, the charge applies only to the £8,000.
The April 2026 rate change, and why mixed balances now need care
Because the Section 455 rate is deliberately pegged to the upper rate of dividend tax, the increase to that upper rate announced in the November 2025 Budget carried the loan charge up with it. Loans made before 6 April 2026 are still charged at 33.75%; anything drawn on or after that date attracts the new 35.75% rate.
That’s a two-point rise, which doesn’t sound dramatic until it’s applied to a real balance. On a £50,000 overdrawn loan, the difference between the two rates is £1,000 – money the company simply didn’t need to find a year ago.
The part worth flagging to any director with a running or fluctuating loan account is the repayment order. Where a balance includes both pre- and post-6 April draws, the default statutory treatment matches repayments against the earliest loans first. That can leave the newer, more expensive 35.75% borrowing outstanding by default – the opposite of what most directors would choose. A Manchester manufacturing SME with an £30,000 balance built up gradually across the 2025/26 and 2026/27 years, for instance, could end up with a larger Section 455 bill than necessary simply because nobody specified which loan a repayment was clearing. A short board minute or director’s note confirming that repayments are to be applied against the post-April 2026 borrowing first is usually enough to fix this, and it’s worth doing before the nine-month deadline rather than after.
How the tax is repaid to the company
This is the part directors often misunderstand: Section 455 tax isn’t a permanent cost. It’s a deposit against a debt the company shouldn’t be carrying, and HMRC will refund it once the loan itself is repaid, written off, or released – but not automatically, and not immediately.
Relief is claimed under Section 458 CTA 2010, and the timing depends on when the loan was cleared:
- If the loan is repaid within nine months of the year-end (before the charge would have even arisen), no Section 455 tax is due in the first place.
- If it’s repaid later, the company can reclaim the tax, but not until nine months after the end of the accounting period in which the repayment was made – which can mean waiting well over a year from when the tax was originally paid.
- The claim itself has to be made within four years of the end of the accounting period in which the loan was repaid.
In practice this means a company can be out of pocket for a substantial stretch even after doing the right thing and clearing the balance, which is one of the strongest reasons to avoid the charge arising at all rather than planning to recover it later.
The trap directors often miss: benefit-in-kind on interest-free loans
Section 455 isn’t the only tax point an overdrawn loan account can create. If the loan is interest-free (or charged below HMRC’s official rate) and the balance exceeds £10,000 at any point in the tax year, it’s treated as a benefit in kind. That means it goes on the director’s P11D, the company pays Class 1A National Insurance on it, and the director picks up an income tax charge personally.
The fix is simple where it applies: if the director pays interest to the company at or above the official rate, the benefit-in-kind charge disappears entirely, and the interest paid stays inside the company rather than being lost to HMRC. It’s a small administrative step that’s easy to overlook when the loan account crept up gradually rather than being drawn deliberately.
The re-borrowing trap: why clearing the balance just before the deadline can backfire
A pattern that catches out directors more often than it should: repaying the loan just before the nine-month deadline, then drawing a similar amount again shortly afterwards. HMRC’s anti-avoidance rules – sometimes called the “bed and breakfasting” or 30-day rule – can treat a new loan made within 30 days of a repayment as if the original loan was never repaid at all, denying relief on it. A further rule aimed at arrangements over £15,000 catches cases where there was a clear intention to redraw a similar amount even outside that 30-day window.
The practical takeaway is that a loan account should be cleared because the underlying cash position has genuinely improved – via a declared dividend, a bonus, or a capital introduction – not as a short-term manoeuvre to dodge one tax return’s deadline.
Keeping the account from becoming a recurring problem
Most overdrawn loan accounts don’t happen by design; they build up gradually through personal expenses paid from the business account, or dividends drawn before there were sufficient distributable reserves to support them. A few habits keep it from becoming an annual scramble:
- Review the loan account balance well before the year-end, not at it, so there’s time to declare a dividend or arrange a bonus if the account needs clearing.
- Keep a clear running record of what’s been drawn and repaid through the year rather than reconstructing it at accounts time.
- Where a balance does straddle a rate change like the one in April 2026, document the repayment allocation explicitly rather than relying on the default order.
- Treat a persistently overdrawn account as a signal to review how income is being extracted from the company more broadly – salary, dividends, and pension contributions are usually a more tax-efficient route than an ongoing loan.
An overdrawn director’s loan account isn’t unusual, and on its own it isn’t a problem. It becomes an expensive one only when it’s left unmanaged past the nine-month mark, drawn without regard to the April 2026 rate change, or cleared and redrawn in a pattern HMRC’s anti-avoidance rules were built to catch. Directors with a live overdrawn balance, or one that’s likely to still be outstanding at their next year-end, may want to get their repayment and allocation position reviewed before the deadline rather than after it.