Director's Loan Account and S455 Tax Explained (in Plain English)
If you have ever taken money out of your own limited company that was not salary, dividend, or a repayment of expenses, you may have created a director's loan without realising it. Left unmanaged, this can trigger two separate tax charges at once. Here is exactly how it works, explained simply.
What is a director's loan account?
A director's loan account (DLA) is a running record of money moving between you personally and your company, outside of salary, dividends, and genuine expense reimbursements. It's a distinct third route from how most directors normally extract income, our salary vs dividends guide covers the two routes this guide sits alongside.
It moves in both directions:
- You owe the company (the loan account is "overdrawn") when you take out cash, have the company pay a personal bill, or the company pays a third party on your behalf, without it being recorded as salary or dividend
- The company owes you (a credit balance) when you put your own money into the company, or the company has not yet paid you a salary or dividend it owes you
This guide focuses on the situation that catches people out: an overdrawn director's loan account, where you owe the company money.
Why an overdrawn loan account matters
A director's loan is not automatically a problem. Plenty of businesses have short-term director's loans that get cleared cleanly. The tax exposure comes from two separate rules, and it is genuinely easy to trigger both without realising it.
S455 tax: the company's charge
If your director's loan is still outstanding 9 months and 1 day after the end of your company's accounting period, the company must pay a tax charge on the outstanding balance, reported and paid alongside your Corporation Tax return, though it is a separate charge, not a reduction of taxable profit.
Current rate: 35.75% for loans made or benefits conferred on or after 6 April 2026 (up from 33.75% previously). This rate has historically tracked the higher rate of dividend tax, which also rose in April 2026, which is why both numbers moved together.
Worked example: your company has a 31 March year end. In October, you withdraw £20,000 for personal use. The loan is still outstanding at the year end (31 March), and still outstanding on 1 January the following year, the 9 month and 1 day deadline. The company now owes S455 tax of £20,000 × 35.75% = £7,150.
The good news: this tax is not necessarily lost forever. Once the loan is genuinely repaid, the company can reclaim the S455 tax it paid, though the reclaim itself is only available 9 months after the end of the accounting period in which the loan was actually repaid, which creates a real cash flow gap even though the money eventually comes back.
Benefit in Kind: the director's personal charge
This is a completely separate rule that can apply at the same time as S455, many people only know about one of the two and are caught out by the other.
If your loan balance exceeds £10,000 at any point during the tax year, and the company does not charge you interest at least equal to HMRC's official rate, the "missing" interest is treated as a taxable benefit on you personally.
HMRC's official rate of interest for 2026/27: 3.75%
Two important details people often miss:
- The £10,000 test looks at the highest balance at any point in the year, not the year end balance and not an average. Even a loan that peaks at £12,000 for a few days and is then repaid can trigger this rule for the whole tax year it happened in
- If the company charges no interest, or interest below 3.75%, the shortfall becomes a benefit in kind. The company reports it on a P11D, pays Class 1A National Insurance (at the employer rate, 15% for 2026/27) on the benefit value, and you pay Income Tax on it personally, through your tax code or Self Assessment
Worked example: a director has a £12,500 loan outstanding all year, paying no interest, and is a higher rate taxpayer. The benefit value is £12,500 × 3.75% = £468.75. Income Tax on that at 40% costs the director £187.50. The company separately pays Class 1A National Insurance at 15% on the same £468.75, an extra £70.31. Total cost across both parties for the year: around £258.
The simplest fix: if your loan is likely to exceed £10,000, have the company charge you interest at or above the official rate (3.75% for 2026/27). Do this and the benefit in kind disappears entirely, no P11D entry needed for this specific issue.
S455 vs Benefit in Kind, at a glance
| S455 tax | Benefit in kind | |
|---|---|---|
| Triggered when | Loan still outstanding 9 months + 1 day after the accounting period ends | Loan balance exceeds £10,000 at any point, with insufficient interest charged |
| Rate | 35.75% of the outstanding balance | Income Tax on the notional interest (director) + 15% Class 1A NI (company) |
| Who pays | The company | The director (Income Tax) and the company (NI) |
| How to avoid it | Repay in full before the 9 month and 1 day deadline | Charge interest at or above the 3.75% official rate |
"Bed and breakfasting": why you cannot just repay and re-borrow
Some directors used to repay an overdrawn loan just before the 9 month deadline, avoiding S455, then immediately borrow the money again a few days later. HMRC calls this "bed and breakfasting" and has specific anti-avoidance rules blocking it.
Broadly, if £5,000 or more is repaid and a new loan of £5,000 or more is drawn within 30 days, or there was ever an arrangement to redraw the funds, HMRC treats the original loan as if it were never repaid for S455 purposes. A genuine, permanent repayment is fine. A repayment followed by re-borrowing on the same pattern is not.
What happens if the loan is written off instead of repaid?
If a director's loan is written off rather than repaid, the amount written off is generally treated as taxable income for the director, often taxed similarly to a dividend, and this can trigger National Insurance implications too depending on the circumstances. Writing off a loan is frequently more expensive overall than simply repaying it, once the combined tax effects are worked through. This is a decision worth modelling properly before assuming it is the easy way out.
Common questions
Does S455 apply if I repay the loan before the 9 month deadline?
No, if the loan is genuinely repaid before 9 months and 1 day after the accounting period end, and stays repaid (not bed and breakfasted), no S455 charge arises on that balance at all.
Can I owe both S455 and the Benefit in Kind charge on the same loan?
Yes, this is exactly the trap most guides do not explain clearly enough. S455 is about whether the loan is still outstanding 9 months after the year end. The Benefit in Kind rule is about whether the loan exceeded £10,000 at any point and had insufficient interest charged. A single loan can trigger both, on different timelines, calculated differently.
What is the simplest way to avoid both charges?
Keep the loan below £10,000 at all times if possible, and repay any loan in full before the 9 month and 1 day deadline, with no re-borrowing arrangement. If the loan will exceed £10,000, charge yourself interest at or above HMRC's official rate to avoid the Benefit in Kind charge specifically.
Does an overdrawn director's loan reduce the company's Corporation Tax bill?
No. An overdrawn director's loan does not reduce the company's taxable profits for Corporation Tax purposes, it sits separately as a balance owed to the company, not as a deductible expense.
I have a credit balance, the company owes me money. Does any of this apply?
No, these rules apply to overdrawn loans, where the director owes the company. If you have lent money to your own company, the company can generally repay you tax free at any time, and may pay you reasonable commercial interest on the balance if it chooses to.
How Books & Returns helps
Director's loan accounts are one of the areas where the rules are genuinely simple once explained properly, but easy to get wrong in practice, especially when the 9 month S455 deadline and the £10,000 Benefit in Kind threshold interact. We track your loan account balance throughout the year, flag it before either deadline becomes a problem, and help structure interest charges or repayments to minimise the tax cost properly, rather than finding out about a charge after it has already been triggered.
This guide is for general information only and does not constitute tax advice. Director's loan rules depend on your specific circumstances, always confirm your position with a qualified accountant before making decisions based on this content.