The director's loan account: what it is and why an overdrawn balance costs money
Most problems on a small company's balance sheet trace back to one line: the director's loan account. It is simply a record of money moving between you and your company, and when it tips the wrong way, HMRC takes an interest.
What the account records
You and your company are separate legal persons, so every pound that passes between you has to be classified. Salary goes through payroll; dividends are declared from profits. Anything else, money you lend the company, expenses you pay personally, or money you take out that is neither salary nor dividend, lands in the director's loan account. If the company owes you, the account is in credit and you can draw it tax-free. If you owe the company, it is overdrawn, and that is where the rules start.
How it goes overdrawn without anyone deciding
- Round-sum transfers to a personal account during the year, labelled "dividends" at year-end
- Dividends declared when there were not enough profits to cover them, which must be reclassified as loans
- Personal spending on the company card
- Money taken out before a year-end bonus or dividend was properly declared
The Section 455 charge and the nine-month rule
If the account is overdrawn at the company's year-end and still not repaid nine months and one day later, the company pays a temporary tax charge on the outstanding balance at the dividend upper rate (35.75% for loans made in 2026/27, 33.75% for earlier years). The charge is refunded once the loan is repaid, but not until nine months after the end of the accounting period in which repayment happens, so the company can be out of pocket for the best part of two years. Repaying and immediately re-borrowing does not work: amounts over £5,000 repaid and redrawn within 30 days, or with arrangements to redraw, are treated as never repaid.
The benefit-in-kind trap
Separately, if the loan exceeds £10,000 at any point in the tax year and the company charges no interest, or less than HMRC's official rate, the difference is a taxable benefit. That means a P11D for you, Class 1A National Insurance for the company and extra tax on your return, all for borrowing you may not have noticed taking.
Keeping it clean
Take a regular salary through payroll. Declare dividends properly, with reserves checked and minutes written, before the money moves. Keep personal spending off the company card. And look at the balance quarterly rather than discovering it at year-end; our note on dividends and salary covers how the pieces fit. A loan account that is reviewed monthly rarely becomes a problem; one that is reconstructed annually almost always is.
This note is general guidance, not advice on your circumstances. If your loan account is a mystery until the accounts are done, our management reporting keeps it in view all year. Talk to us.
Published 7 October 2026.