If you run a limited company, you may have taken money out of the business that was not salary, a dividend or a reimbursed expense. When that happens, the amount is recorded in your director’s loan account — and if the account is overdrawn, tax charges can follow.
This guide explains what an overdrawn director’s loan is, the Section 455 tax charge of 33.75%, the 9 months and 1 day deadline, the benefit in kind rules for cheap loans and the 30-day bed-and-breakfasting rule.
What Is an Overdrawn Director’s Loan Account?
Every director has a director’s loan account with their company. Money the director puts in — such as personal funds used for business costs — is credited to the account. Money taken out — such as cash drawings, personal bills paid by the company or assets taken for private use — is debited from it.
If the director takes out more than they put in, the director’s loan account is overdrawn. In plain terms, the director owes the company money. This is common in small companies, but it is a loan, and it carries tax consequences if it is still outstanding at certain dates.
An overdrawn account is different from salary or dividends. Salary is taxed through PAYE, and dividends are declared from profits after corporation tax. A loan is neither — and treating regular drawings as loans without a plan is where many directors run into trouble.
Section 455 Tax: The 33.75% Charge
When a company lends money to a director or other participator (generally a shareholder), and the director’s loan account is still outstanding at the corporation tax due date, the company must pay Section 455 tax. The charge is 33.75% of the outstanding loan.
For example, if a director owes the company £20,000 at the relevant date, the Section 455 tax is £6,750. The tax is paid by the company, not the director — but the cost lands on the business either way.
The 9 Months and 1 Day Deadline
Section 455 tax is due 9 months and 1 day after the end of the company’s accounting period. That is the same date corporation tax is normally due. So if your company’s year end is 31 March, the Section 455 tax on any loan outstanding at that date is due by 1 January the following year.
If the loan is repaid in full within the 9 months and 1 day after the year end, no Section 455 tax is due at all. This is an important planning point: clearing the loan before that deadline removes the charge entirely.
Reclaiming Section 455 Tax After Repayment
Section 455 tax is not necessarily a final cost. If the loan is repaid later, the company can claim the tax back. Relief is given 9 months after the end of the accounting period in which the loan was repaid or written off, and the company claims it through its corporation tax return.
That means the company may have the cash tied up for a considerable time — often well over a year — before the repayment comes back. It is far better to avoid the charge by repaying within the 9 months and 1 day window.
Benefit in Kind: Cheap Loans Over £10,000
There is a second charge for the director personally. If a director (or employee) has a cheap or interest-free loan from the company, and the total of all such loans exceeds £10,000 at any point in the tax year, there is a taxable benefit in kind.
The benefit is based on HMRC’s official rate of interest, less any interest the director actually paid. The director pays income tax on that benefit, and the company pays Class 1A National Insurance on it. It must be reported on the P11D form.
In practice, charging interest on the loan at the official rate avoids the benefit in kind altogether — but the interest must actually be paid, not just added to the loan balance.
The 30-Day Bed-and-Breakfasting Rule
HMRC has anti-avoidance rules to stop directors repaying a loan just before the year end and borrowing the same money again straight afterwards. The main rule is the 30-day rule: if a loan is repaid and a new loan of £5,000 or more is taken out within 30 days, the repayment is matched against the new loan first, so it does not reduce the original loan for Section 455 purposes.
There is also an arrangements rule: where a repayment of £5,000 or more is made with the intention of taking the money out again, HMRC may disregard the repayment. In short, a repayment only counts if the money genuinely stays in the company.
What Happens If the Loan Is Written Off?
If the company writes off a director’s loan, the amount written off is treated as a distribution — effectively a dividend — and the director is taxed on it as dividend income. The company, however, gets no corporation tax deduction for the write-off. Writing off a loan is usually the most expensive way to deal with it.
Practical Steps to Manage a Director’s Loan Account
- Check your loan account regularly. Review the balance at least monthly, and before the year end, so you know where you stand.
- Clear it before the deadline. If the account is overdrawn at the year end, repay it within 9 months and 1 day to avoid Section 455 tax entirely.
- Charge interest at the official rate. If a loan will run for a while, interest at HMRC’s official rate avoids a benefit in kind — and pay the interest, rather than adding it to the balance.
- Keep a clear paper trail. Record every drawing and repayment, with dates, so the loan account is accurate and repayments can be proved.
- Plan drawings properly. Pay yourself through salary and dividends where possible, and agree a monthly drawing that fits the company’s profits, rather than taking ad hoc amounts.
Related reading: Just starting your company? Read our guide to how to set up a limited company in the UK, from choosing a name to registering with HMRC.
Frequently Asked Questions
Does Section 455 tax apply to any money I take from the company?
No. Salary, dividends and genuine expense reimbursements are not loans, so they do not create a Section 455 charge. Only amounts that leave you owing the company money count.
I repaid the loan after the year end. Do I still pay Section 455 tax?
Not if you repaid it in full within 9 months and 1 day after the end of the accounting period. If the repayment was made later, Section 455 tax is payable, but the company can claim it back once the loan has been repaid — subject to the timing rules explained above.
What is the official rate of interest?
HMRC sets an official rate of interest, which changes from time to time. If your company charges you less than this rate on a loan over £10,000, the difference is a taxable benefit in kind.
Can the company simply write off my loan?
It can, but the amount written off is treated as a dividend for the director, and the company gets no tax deduction. It is usually far better to repay the loan.
How We Can Help
Director’s loan accounts are a common source of unexpected tax bills, but they are also easy to manage with regular reviews and a plan for drawings. Financial Accounting Firm helps directors keep their loan accounts in order and avoid Section 455 charges. Contact us to discuss your position.
This article is general information only and should not be taken as personal tax or financial advice. Tax rules can change, and your position will depend on your own circumstances.
