A director’s loan happens when a company director takes money from their limited company outside of salary, dividends or reimbursed expenses. In the UK, this money is legally owed back to the company and HMRC has strict rules on how it must be managed.
Because a limited company is a separate legal entity, using company funds as personal money without following the correct procedures can lead to tax liabilities. Loans not repaid on time or exceeding reporting limits can result in additional taxes and penalties under UK law.
Knowing when a director’s loan can work in your favour, when it creates extra charges and how to stay compliant helps directors make informed decisions and plan repayments effectively.
Key Takeaways:
A director’s loan must be recorded in a director’s loan account (DLA) and reported on the company’s balance sheet at year-end.
If a director’s loan is not repaid within nine months and one day of the company’s accounting year-end, the company faces a Section 455 tax charge on the outstanding balance.
Loans exceeding £10,000 are treated as a benefit in kind. The company must report this on a P11D and pay Class 1 National Insurance.
In most cases, taking a salary or dividend is more tax-efficient than a director’s loan, but a short-term loan can be useful when managed strictly and repaid promptly.
Note: This article has been updated and republished on 12 April 2026 to include the latest 2026-27 information about Understanding Director’s Loans.
When a Director’s Loan Can Work in Your Favour
A director’s loan is not automatically a bad idea. In the right circumstances, it is a practical and legitimate option. Here are the three situations where it genuinely makes sense.
Short-Term Cash Flow Needs
If you need personal funds for a short period and are confident of repaying within nine months and one day of your company year-end, a director’s loan can bridge the gap without triggering extra tax.
No Section 455 tax applies if the balance is fully cleared within that window.
Loans under £10,000
Borrowing below £10,000 avoids the benefit-in-kind rules entirely, provided you do not take another loan of £5,000 or more within 30 days of repayment.
This is the bed-and-breakfasting rule. HMRC introduced it specifically to prevent directors from cycling loans to sidestep reporting obligations. Stay below the threshold and no P11D is required.
Director Lending Money to the Company
The DLA works both ways. If you lend money to your company, the company owes you.
This can be a flexible alternative to external financing. You can charge interest at a commercially justifiable rate, making it a director’s loan to company arrangement that works in your favour financially.
When a Director’s Loan Costs You: The HMRC Rules
This is where most directors run into difficulty. Missing any one of these rules creates a real and avoidable tax cost.
Section 455 Tax and the Nine-Month Rule
If your DLA is overdrawn at year-end and the balance is not cleared within nine months and one day, your company owes Section 455 tax on the outstanding amount.
As confirmed on the directors loans repayment page, director’s loans outstanding 9+ months after year-end trigger Section 455 tax at 33.75% (reported via CT600A).
Note: The 35.75% rate applies only to the anti-avoidance rule (repaying ≥£5k then re-borrowing within 30 days) for loans made on/after 6 April 2026. Standard S455 tax remains 33.75% regardless of loan date.
The charge is repayable once the loan is repaid, but HMRC interest accrued in the meantime is not recoverable. The ICAEW has also confirmed that HMRC is actively reviewing director’s loan compliance, so this is not an area to leave unmanaged.
Loans Over £10,000 and the Benefit in Kind Rules
Once your director’s loan exceeds £10,000 at any point in the tax year, HMRC classifies it as a benefit in kind.
The company must report it on a P11D and pay Class 1 National Insurance. As the Association of Taxation Technicians (ATT) explains, the benefit arises simply because the threshold has been crossed, regardless of whether interest is charged.
If you do not pay interest at or above HMRC’s official rate, you also face a personal income tax charge on the shortfall. The Association of Taxation Technicians ATT has confirmed that the official rate rose to 3.75% per annum from 6 April 2025 and is now reviewed quarterly. The current rate is always available via GOV.UK’s beneficial loan arrangements rates guidance.
Tax Implications of Writing Off Director’s Loans
If the company writes off the loan entirely rather than requiring repayment, the amount written off becomes taxable income for you personally.
Income tax is due through self-assessment and the company must process Class 1 National Insurance through payroll. Writing off a loan rarely makes financial sense and should only be considered with professional advice.
Section 455 tax, benefit-in-kind reporting and written-off loan rules each interact with personal income tax and corporation tax in different ways.
Working with a specialist accountant, such as the team at DNS CloudCo, ensures your DLA is structured to minimise tax exposure and stay clear of HMRC issues before they arise.
Director’s Loan vs Dividend vs Salary: Which is Right?
Knowing your options side by side makes the decision much clearer. Here is how the three main withdrawal methods compare.
| Method | Tax Treatment | Best When |
|---|---|---|
| Salary | Income tax and NI on full amount | Regular, predictable income needed |
| Dividend | Dividend tax (lower rates), no NI | Company is profitable with retained earnings |
| Director’s loan | No immediate tax if under £10,000 and repaid within 9 months and 1 day | Short-term personal cash need only |
| Director’s loan (not repaid) | Section 455 at 33.75% on the outstanding balance – never advisable, avoid through forward planning | Never advisable, avoid |
Note: A separate anti-avoidance rate of 35.75% applies where a director repays £5,000 or more and re-borrows within 30 days on or after 6 April 2026.
In most situations, a tax-efficient mix of salary and dividends is the better route.
A director’s loan is not a substitute for tax planning. It is a short-term tool with strict conditions and it should be used only when those conditions can genuinely be met.
How to Manage Your Director’s Loan Account Correctly
Four habits keep your DLA clean and your compliance intact.
1. Record Every Transaction As It Happens
Do not wait until year-end to update the DLA. Every withdrawal that is not salary, dividend or expense needs to go in at the time it occurs. Gaps and errors created by reconstructing records later are exactly what HMRC looks for.
2. Know Your Repayment Deadline Before You Borrow
Work out the nine months and one day deadline from your accounting year-end before drawing the loan, not after. Once that date passes with an outstanding balance, the Section 455 charge is unavoidable.
3. Watch the £10,000 Threshold Carefully
If you are approaching that figure, factor in the P11D reporting and Class 1 National Insurance obligations before proceeding. Crossing the threshold without planning for it creates an immediate compliance issue.
4. Check the DLA Before Year-End
A pre-year-end review with your accountant gives you time to repay, restructure or declare a dividend before the accounts are finalised. Addressing an overdrawn DLA after the fact is always more complicated and more expensive than dealing with it in advance.
Conclusion
A director’s loan is a tool, not a tax strategy. If used carefully – kept within the £10,000 threshold, repaid within nine months and one day, and recorded accurately from the start – it can serve a genuine short-term purpose. Used without a plan, it creates Section 455 liabilities, benefit-in-kind obligations and year-end problems that could easily have been avoided.
The good news is that every risk attached to a director’s loan is manageable with the right preparation. The decisions are not complicated when approached early and with the right support.
Managing a director’s loan account correctly requires timely record-keeping, year-end planning and a clear understanding of HMRC’s rules. DNS CloudCo’s chartered accountants work with limited company directors across the UK to keep loan accounts compliant, tax positions optimised and year-ends free of surprises. To speak with the team directly, call 01908 886755 or email info@dnscloudco.co.uk.
FAQs
What is a director’s loan?
Any money you take from your limited company outside of salary, dividends or expenses. It is a debt owed back to the company and must be recorded in the DLA.
What is a director’s loan account (DLA)?
A running record of all transactions between you and your company outside salary, dividends and expenses. It must appear on the balance sheet at year-end.
How does a director’s loan work?
You draw money from the company, it is recorded in the DLA and you repay it. Tax rules apply based on the loan amount and how long it remains outstanding.
What is the nine-month rule for director’s loans?
If your DLA is overdrawn at year-end, you must repay within nine months and one day to avoid a Section 455 tax charge on the outstanding balance.
What is Section 455 tax and when does it apply?
A corporation tax charge on overdrawn loans not repaid within nine months and one day. The rate is 33.75% for pre-April 2026 loans and 35.75% from April 2026 onwards.
What happens if my director’s loan exceeds £10,000?
It becomes a benefit in kind. The company must file a P11D, pay Class 1 National Insurance and you may face income tax if interest falls below HMRC’s official rate of 3.75%.
Can I write off a director’s loan?
Yes, but the written-off amount becomes taxable income for the director. Income tax applies through self-assessment and the company must pay Class 1 National Insurance through payroll.
Is a director’s loan better than a dividend?
Rarely, dividends carry lower tax rates and no National Insurance. A director’s loan only makes sense short-term, when kept below £10,000 and repaid within nine months and one day.
Can a director lend money to their own company?
Yes, the DLA moves into credit, meaning the company owes you. You can charge interest at a commercially justifiable rate as a flexible alternative to external borrowing.
Should I speak to an accountant before taking a director’s loan?
Yes, if your loan is over £10,000 or near your year-end, speak to a qualified accountant. They can ensure your director’s loan account is structured correctly, helping you avoid Section 455 charges and benefit-in-kind issues.
Divyanshi is a subject matter expert in the UK accounting space, creating clear and easy-to-read content for accountants and businesses. She covers topics such as VAT returns, Self-assessment tax, bookkeeping, business planning and Year-end accounts. By understanding the common challenges faced by accountants and business owners, she focuses on writing content that answers real questions and simplifies complex topics. Her approach keeps information clear, relevant and useful for everyday business needs.
