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Tax on a directors loan arises when money taken from a limited company is not repaid on time, charged correctly, or structured properly. A director’s loan is not automatically taxable, but specific rules can trigger Corporation Tax and personal tax.
If the loan remains outstanding nine months and one day after the company’s year end, Section 455 tax may apply at 33.75% of the outstanding balance. Separate benefit in kind rules can apply where the loan exceeds £10,000 and no interest is charged at HMRC’s official rate. If a loan is written off, it is usually treated as dividend income for the director.
Understanding how tax on directors loan works helps you avoid unnecessary charges and HMRC scrutiny. Working with a specialist limited company accountant ensures your director’s loan account is reviewed properly and managed in line with current UK rules.
This guide explains when a director’s loan is taxable, how Section 455 operates, when personal tax applies, and how to stay compliant.
What is a director’s loan account?
A director’s loan account (DLA) records money that passes between a limited company and its director outside normal salary, dividend, or expense payments.
If you take money from your company that is not:
- A salary processed through PAYE
- A declared dividend
- A repayment of business expenses
- Money you previously lent to the company
It is usually recorded through your director’s loan account.
A debit balance means you owe the company money. A credit balance means the company owes you.
Because a limited company is a separate legal entity, withdrawals must be recorded properly in the company’s accounts. You can read more about how this structure works in our guide to limited company meaning and benefits.
Is a director’s loan taxable?
A director’s loan is not automatically taxable. Tax arises depending on how long the loan remains outstanding and how it is structured.
There are three main tax triggers:
1. Section 455 company tax
If the loan is not repaid within nine months and one day of the company’s year end, the company may owe Section 455 tax.
2. Benefit in kind rules
If the loan exceeds £10,000 at any time in the tax year and no interest is charged at HMRC’s official rate, the director may face a benefit in kind charge.
3. Loan written off
If the company writes off the loan, the amount is usually treated as dividend income for the director and taxed personally.
Understanding which of these applies is central to managing tax on directors loan correctly.
Section 455 tax explained
Section 455 tax applies to close companies where a director’s loan remains unpaid nine months and one day after the accounting period ends.
The current rate is 33.75% of the outstanding balance.
This is a temporary Corporation Tax charge. The company can reclaim it once the loan is repaid or written off, although the refund is not immediate.
You can read a detailed breakdown in our guide to Section 455 tax.
Example
- Loan taken: £20,000
- Year end: 31 March 2025
- Loan unpaid at 1 January 2026
Section 455 tax due:
£20,000 × 33.75% = £6,750
The £6,750 is payable with the company’s Corporation Tax. It becomes repayable after the loan is cleared, subject to HMRC processing timelines.
HMRC provides detailed guidance on loans to directors and participators, including how Section 455 applies and when tax becomes repayable.
Do you pay personal tax on a director’s loan?
Company tax and personal tax are separate issues.
Benefit in kind
If the loan exceeds £10,000 and no interest is charged at HMRC’s official rate, the difference may be treated as a benefit in kind.
The director:
- Declares the benefit on Self Assessment
- Pays Income Tax on the calculated interest benefit
The company:
- Files a P11D
- Pays Class 1A National Insurance
Loan written off
If the company writes off the loan, the amount is normally treated as a dividend.
The director must:
- Declare it on their Self Assessment
- Pay dividend tax at the applicable rate
The company may also face National Insurance implications depending on the circumstances. Dividend treatment is explained further in our guide to tax on dividends in the UK.
Can you avoid tax on a director’s loan?
The objective should always be compliant tax planning, not avoidance.
Lawful ways to reduce exposure include:
- Repaying the loan within nine months of year end
- Declaring dividends properly where sufficient profits exist
- Charging interest at HMRC’s official rate
- Maintaining accurate and timely records
It is important to understand the distinction between legitimate planning and unlawful behaviour. See our guide to tax avoidance vs tax evasion vs tax planning for clarity.
If you regularly extract funds from your company, structured planning around tax-efficient ways to withdraw money is often more appropriate than relying on a loan.
Bed and breakfasting rules explained
HMRC introduced anti-avoidance rules to prevent directors from repaying loans just before the nine month deadline and immediately borrowing again.
Two rules apply:
The 30-day rule
If you repay more than £5,000 and borrow again within 30 days, the repayment may be ignored for Section 455 purposes.
The arrangements rule
If the balance exceeds £15,000 and there is an arrangement to borrow again, the repayment may also be ignored.
These rules mean temporary repayments designed purely to avoid tax are ineffective.
What happens if a director’s loan is written off?
When a loan is written off:
- Section 455 may become reclaimable by the company
- The director is treated as receiving a dividend
- Dividend tax applies
This can create a significant personal tax liability, particularly where the dividend allowance has already been used. You can review current thresholds in our guide to the dividend allowance.
Writing off a loan should be considered carefully, as it has both accounting and tax consequences.
Review your director’s loan balance at least three months before your company year end. This gives time to repay the loan, declare dividends correctly, or adjust your withdrawal strategy before Section 455 applies.
What happens to a director’s loan account when a director leaves?
An outstanding director’s loan does not disappear when a director resigns.
Typically:
- The balance must be repaid
- It may be offset against declared dividends
- It may be written off, triggering dividend tax
- In insolvency situations, a liquidator may pursue repayment
The balance remains an asset of the company if overdrawn. Failure to address it can create disputes or compliance risks.
Common mistakes with directors’ loans
Common errors include:
- Treating withdrawals as dividends without sufficient retained profits
- Ignoring the nine month repayment deadline
- Reborrowing within 30 days
- Failing to charge interest on loans above £10,000
- Not reporting benefit in kind correctly
HMRC can impose penalties for incorrect reporting. See our guide to HMRC and Companies House fines for further detail.
How Sleek helps manage tax on directors loan
Director’s loan accounts require ongoing monitoring, not just year-end adjustments.
Sleek supports limited company directors by:
- Reviewing DLA balances throughout the year
- Planning dividend declarations correctly
- Monitoring Section 455 exposure
- Preparing P11D filings where required
- Ensuring Corporation Tax and personal tax are aligned
Our compliance-first approach reduces risk and ensures your withdrawals are structured correctly.
Disclaimer: The preceding information is not legal advice. This content is aimed to provide general guidance. For more formal or legal advice, contact Sleek directly.
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FAQs on tax on directors loan
Is a director’s loan taxable in the UK?
A director’s loan is not automatically taxable. Tax on directors loan arises if the balance remains unpaid nine months and one day after the company’s year end, exceeds £10,000 without interest charged at HMRC’s official rate, or is written off. In these cases, Section 455 tax, benefit in kind charges, or dividend tax may apply.
How long can a director’s loan stay outstanding?
A director’s loan can remain outstanding for up to nine months and one day after the end of the company’s accounting period without triggering Section 455 tax. After this deadline, the company may owe 33.75% of the unpaid balance until the loan is repaid or formally written off.
What is Section 455 tax on directors’ loans?
Section 455 tax is a Corporation Tax charge applied to close companies when a director’s loan remains unpaid after the nine month deadline. The current rate is 33.75% of the outstanding balance. The tax is usually reclaimable once the loan is repaid, although repayment of the tax is subject to HMRC timing rules.
Do you pay personal tax on directors’ loans?
Personal tax may arise if the loan exceeds £10,000 and no interest is charged at HMRC’s official rate. In that case, a benefit in kind is reported and taxed. If the loan is written off, the amount is normally treated as dividend income and taxed through the director’s Self Assessment return.
Can you avoid tax on a director’s loan?
You can reduce tax exposure through compliant planning rather than avoidance. Repaying the loan within nine months, charging interest correctly, and declaring dividends only where sufficient profits exist are legitimate approaches. Anti-avoidance rules prevent temporary repayments designed solely to bypass Section 455 tax.
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What happens if a director’s loan is written off?
If a director’s loan is written off, the amount is usually treated as dividend income for the director. Dividend tax applies at the relevant rate. Any Section 455 tax previously paid by the company may become reclaimable, although this does not remove the director’s personal tax liability.
What happens to a director’s loan account when a director leaves?
An overdrawn director’s loan account does not disappear when a director resigns. The balance normally remains repayable to the company. It may be offset against dividends or formally written off, which can trigger tax consequences. In insolvency situations, a liquidator may pursue recovery of the outstanding amount.
