If you run a limited company and dip into the business account for personal spending, you have a directors loan account - whether you realise it or not. And from April 2026, HMRC has raised the tax cost of getting it wrong by 2 percentage points.
TL;DR: A directors loan account tracks money flowing between you and your company. If you owe the company money and don't repay within 9 months of your year end, the company pays a 35.75% Section 455 tax charge (up from 33.75% pre-April 2026). Loans over £10,000 also trigger a benefit in kind. HMRC is actively targeting directors loan compliance.
What Is a Directors Loan Account?
A directors loan account (DLA) records every transaction between you personally and your limited company. Money flows both ways. Your salary, dividends, and expense reimbursements go one direction. Personal withdrawals, company card spending, and cash drawings go the other.
When your company owes you money, the DLA is "in credit" and there is no tax issue. When you owe the company money, the DLA is "overdrawn" and the problems start. Nearly all small UK companies are classified as close companies (GOV.UK consultation, 2026), which means these rules apply to most owner-managed businesses.
What Is the Section 455 Tax Charge?
Section 455 of the Corporation Tax Act 2010 is where directors loan accounts get expensive. If your DLA is overdrawn at your company's year end and you haven't repaid the balance within 9 months and one day, your company must pay a tax charge on the outstanding amount.
From 6 April 2026, that charge is 35.75% (Merranti Accounting, 2026). The previous rate was 33.75%. The increase mirrors the 2-percentage-point rise in dividend tax rates announced in the Autumn Budget 2025. For a £50,000 overdrawn balance, that is £17,875 your company hands to HMRC - on top of whatever corporation tax it already owes.
The charge is refundable once you repay the loan, but HMRC does not process that refund quickly. In our experience, companies wait 6 to 9 months after repayment before seeing the money back. That creates a real cash flow problem, especially for smaller businesses.
Does the Rate Apply to All Outstanding Loans?
Not automatically. Loans advanced before 6 April 2026 attract Section 455 at the old 33.75% rate. Loans from 6 April 2026 onwards are charged at 35.75% (Walter Dawson & Son, 2026). Where a director makes partial repayments after the rate change, the company and director can jointly specify which loans the repayment clears first.
This matters if you have a mix of pre- and post-April 2026 borrowings. Repaying the newer, higher-rate loans first saves your company money.
When Does a Benefit in Kind Arise?
If your overdrawn DLA exceeds £10,000 at any point during the tax year and you are not paying interest at HMRC's official rate, the shortfall is treated as a benefit in kind (ATT, 2026).
The official rate of interest sits at 3.75% for 2025-26, up from 2.25% previously (Crowe UK, 2025). From April 2025, HMRC now reviews this rate quarterly and can adjust it mid-year - something that was not possible before (Herbert Smith Freehills, 2025).
The benefit in kind must be reported on your P11D, and your company pays Class 1A National Insurance at 13.8% on the benefit amount. What we see most often is directors who had no idea a benefit in kind applied because their loan balance only briefly crossed the £10,000 mark during the year. The threshold applies at any point, not just at year end.
What Are the Anti-Avoidance Traps?
HMRC has seen every version of the "repay it just before the deadline and borrow it back" strategy. The legislation blocks two specific patterns:
If you repay £5,000 or more and borrow again within 30 days, HMRC ignores the repayment entirely for Section 455 purposes. The loan is treated as if it was never repaid.
If the outstanding balance exceeds £15,000 and there is an arrangement - formal or informal - to reborrow after repayment, HMRC can also disregard the repayment (HMRC guidance, 2026).
One question clients always ask is whether paying a dividend to clear the DLA counts as a repayment. It does, but the dividend itself is taxable income. You need to compare the cost of paying dividend tax at the new 2026-27 rates against the cost of the Section 455 charge.
What Happens If the Loan Is Written Off?
Writing off a directors loan does not make the tax disappear. Under ITTOIA 2005 s415, a released or written-off loan to a participator in a close company is treated as a distribution. That means the director pays income tax at dividend rates on the full amount - 8.75% (basic rate), 33.75% (higher rate), or 39.35% (additional rate) for 2025-26.
From April 2026, those dividend rates increase by 2 percentage points: 10.75%, 35.75%, and 41.35% respectively. The company also gets relief from its Section 455 charge when the loan is written off, but the personal tax bill on the director often runs into thousands.
HMRC launched an enforcement campaign in 2024 targeting directors who had loans released or written off between April 2019 and April 2023, sending nudge letters to those whose tax returns may have omitted the income (KPMG UK, 2024). Responding to one of these letters can trigger a wider enquiry into both the director's and the company's tax position.
How Is HMRC Tightening Reporting?
HMRC published a consultation in March 2026 proposing that close companies provide detailed transaction-level reporting on all payments between the company and its participators (GOV.UK, 2026). That includes cash withdrawals, loans, dividends, asset transfers, and any other distributions. The consultation runs until 10 June 2026.
The small business corporation tax gap stands at £14.7 billion, or 40.1% of the small business theoretical CT liability for 2023-24 (GOV.UK, 2026). Directors loan accounts contribute to that gap. If this proposal goes ahead, your accountant will need transaction-level data for every payment between you and your company - not just a year-end balance.
How Do You Stay on the Right Side of HMRC?
Track your DLA monthly, not annually. Waiting until year-end accounts to reconcile is how balances spiral. Set up a separate nominal code in your accounting software and reconcile against bank statements every month.
If your DLA is overdrawn, plan the repayment before the 9-month deadline. A combination of declaring dividends (check the 2026-27 dividend tax rates first), voting a bonus, or making a genuine cash repayment can clear the balance. Each route has a different tax cost - a bonus triggers income tax and NICs, a dividend triggers dividend tax, and a cash repayment has no tax but needs actual cash.
Pay interest on any balance over £10,000 at HMRC's official rate (currently 3.75%) to avoid the benefit in kind charge. Your company treats the interest received as taxable income, but the overall cost is usually lower than the P11D route. A good accountant can model both scenarios for you - that is part of what our tax advisory service covers.
If you are a limited company director weighing up your options, understanding DLA rules is part of the full picture. And if HMRC penalties are already a concern, adding a Section 455 charge on top makes the situation worse.
Frequently Asked Questions
Can I lend money to my own company?
Yes. When you put personal money into your company, the DLA is in credit and there is no tax charge. Your company can repay you at any time without tax consequences, and you can charge interest (which the company can deduct as an expense). The problems only arise when the loan goes the other way - from company to director.
How long do I have to repay an overdrawn directors loan?
You have 9 months and one day after the end of your company's accounting period. For a company with a 31 March year end, the deadline to repay is 1 January of the following year. Miss that date and the 35.75% Section 455 charge becomes payable.
Does Section 455 apply to all limited companies?
It applies to close companies, which are companies controlled by 5 or fewer participators (typically shareholders). Since nearly all small UK companies meet this definition, the rule catches most owner-managed businesses. Listed companies and their subsidiaries are generally excluded.
What if my accountant has not been tracking the DLA properly?
This is more common than you would expect. Get the account reconciled as soon as possible - work through bank statements, personal card transactions, and any expenses claimed. The sooner you know the accurate balance, the sooner you can plan a tax-efficient repayment before the 9-month deadline hits. If corporation tax penalties are already a risk, a messy DLA compounds the problem.
Need a second opinion on your directors loan account position? Get in touch - we review DLA balances for limited company directors across the UK and can walk you through the most tax-efficient way to clear or manage your account before the next deadline.