Section 455 directors loan UK: tax on directors’ loans explained
A common cause of confusion for company directors is the tax on loans taken from their company. This article explains section 455 directors loan UK rules clearly, so you can spot when a DLA tax charge might arise and make informed choices about repaying directors loan balances.
We cover when the charge applies, how to calculate it, accounting and filing implications, and practical options to clear an overdrawn directors loan account without triggering unnecessary tax costs.
What is a directors loan account and why it matters
A directors loan account (DLA) records transactions between a director (or other participator) and their limited company that are not salary, dividends or expenses. It will show loans the director has taken from the company and repayments they have made.
An overdrawn directors loan account is an amount owed by the director to the company. Small, short-term overdrafts are common, but if the balance remains unpaid the company can face a specific tax charge known as the section 455 charge.
Understanding these rules matters because the tax consequences affect both the company and the director. Planning repayments and record keeping can prevent unnecessary costs and administrative hassle.
What is the section 455 charge?
Section 455 of the Corporation Tax Act covers loans or advances from a close company to its participators that are outstanding after the nine months and one day following the end of the company accounting period. The tax is levied on the company, not directly on the director.
Key points about the section 455 directors loan UK charge:
- It applies to loans, advances and certain unpaid balances owed by participators in a close company.
- The company pays a tax charge on the outstanding amount if it is still unpaid nine months and one day after the end of the accounting period.
- The charge is often referred to as the DLA tax charge or s455 tax.
Which companies and loans are caught by s455?
Section 455 applies where the company is a "close company". Most small trading companies with a small number of shareholders will meet this definition.
Loans and arrangements that can trigger the s455 charge include:
- Loans and advances to directors or shareholders recorded in the directors loan account.
- Money owed by participators under arrangements to provide finance or to secure personal borrowing.
- Certain unpaid expenses or credit balances that represent a benefit to a participator.
There are exceptions. Transactions on an arm’s length commercial basis, bona fide commercial loans with formal terms and interest, and sums repaid quickly will not automatically trigger the charge. Always document the commercial nature of any formal loan to reduce risk.
When exactly does the s455 charge become due?
The timing rule is straightforward but easy to miss in practice. The company will face the s455 charge if a loan is outstanding nine months and one day after the end of the company’s accounting period.
Practical consequences:
- If your company year end is 31 March, the deadline for repayment to avoid s455 is 1 January following the end of that accounting year.
- If the loan is repaid before that deadline there is no s455 liability for that accounting period.
If a loan becomes repayable and is repaid in the same accounting period, it will not create a s455 charge at the nine months cut-off.
How the s455 charge is calculated
The s455 charge is calculated as a percentage of the unpaid loan amount outstanding at the nine months and one day point. The charge is due to Corporation Tax rules and must be included on the company’s tax return.
- The charge is applied to the net outstanding loan balance after allowable set-offs.
- If a loan is partly repaid before the deadline, the s455 charge is only on the remaining unpaid balance.
Example calculation
- Company year end 31 March. Nine months and one day after year end is 1 January.
- Director’s loan outstanding at that date is £10,000.
- The s455 tax charge is applied to that £10,000 figure.
Always check current rates and confirm the precise percentage with HMRC guidance or your accountant, as rates and rules can change across tax years.
Repaying a directors loan – practical options and timing
Repaying directors loan balances promptly is usually the most efficient route to avoid a DLA tax charge. There are several common repayment methods directors use:
- Repay the company from personal savings or from a partner or family member on behalf of the director.
- Receive a salary increase or bonus through payroll – this is subject to PAYE and National Insurance but reduces the DLA balance.
- Pay a dividend where the director is a shareholder, subject to available distributable profits and dividend tax implications.
- Use a third-party loan to repay the company – ensure any security or guarantees are properly documented and not effectively a disguised distribution.
Timing matters. Make sure repayments clear the company bank account before the nine months and one day deadline for the accounting period.
What happens if the company pays the s455 tax?
If the company pays the s455 tax because a loan remained outstanding, the company can normally reclaim that tax when the loan is repaid. This makes s455 a temporary charge intended to encourage repayment rather than a permanent tax on the company.
Practical points:
- The company claims repayment of the s455 charge after the director repays the loan, using the company tax return procedures.
- The repayment process can take time and involves HMRC forms and timing rules, so keep accurate records and work with your accountant.
Interest, benefits in kind and P11D risks
When the director receives a loan at low or zero interest the tax system may treat the difference between a commercial interest rate and the actual rate as a benefit in kind.
- The company may need to report a beneficial loan on a P11D and the director may have a personal tax liability on the benefit.
- If interest is charged at a commercial rate and recorded, the benefit in kind risk is lower.
Where interest is charged and received by the company, that interest is taxable income for the company and should be recorded in bookkeeping and company returns.
What if the company writes off the loan or declares it as remuneration?
Writing off a directors loan has significant tax consequences for the director and the company:
- If the company writes off the loan, the written-off amount is treated as the director receiving a distribution or employment income depending on circumstances.
- This may attract personal tax on the director and could create National Insurance implications.
- The company will need to consider corporation tax relief, stamp duty and potential reporting to Companies House.
A write-off is often an expensive and administratively heavy route compared with formal repayment, so get specialist advice before proceeding.
Accounting and statutory reporting implications
Directors loan accounts should be reported transparently in the company’s statutory accounts and internal bookkeeping. Accuracy matters for company law, tax compliance and good governance.
- Overdrawn directors loan account balances are usually disclosed on the balance sheet and in the notes to the accounts.
- If the company has paid s455 tax, this should be recorded and tracked to ensure reclamation when the loan is repaid.
Good bookkeeping practices reduce the risk of inadvertent s455 charges. If you use cloud accounting software such as Xero, keep the DLA clearly separated and reconciled each month. If you need help, our Bookkeeping & Xero service can assist.
Practical examples
Example 1 – Avoiding s455
- Company year end 31 December. Director loan of £8,000 cleared on 1 September following the year end.
- Because the repayment was made before nine months and one day after the accounting period end, no s455 charge arose.
Example 2 – s455 triggered and reclaimed
- Company year end 31 March. Loan of £15,000 unpaid at 1 January (nine months and one day), so company pays the s455 charge on that balance.
- Director repays the £15,000 six months later. The company claims repayment of the s455 tax from HMRC in line with the claim rules and documentation.
These examples show why timing is crucial and why early planning is far better than remedial action after a charge has been incurred.
How to reduce the risk of a DLA tax charge
To avoid or minimise the risk of a section 455 directors loan UK charge consider these practical measures:
- Repay loans before the nine months and one day deadline for the accounting period.
- If you expect to need funds, consider paying a dividend or salary in advance if profits and payroll allow.
- Document any commercial loans with clear repayment terms and an interest rate to demonstrate a genuine commercial arrangement.
- Keep accurate, up-to-date records of the DLA and reconcile monthly.
If you need tailored planning, our Statutory Accounts & Tax and Fractional CFO services can help you model the tax and cashflow impacts.
Interactions with other taxes and reporting
Section 455 sits within a web of other tax and reporting obligations. Consider these related areas:
- Dividend rules – paying a dividend instead of a loan repayment creates different personal tax consequences for directors.
- Payroll – salary or bonus repayments will go through PAYE and affect National Insurance contributions. See our Payroll & PAYE guidance if you handle this in-house.
- Companies House and statutory accounts – DLA balances must be properly disclosed to keep company filings accurate.
Always consider the combined personal and company tax impact before choosing a repayment strategy.
Common pitfalls and traps to avoid
Directors and companies frequently fall foul of the rules in a few repeat ways. Avoid these mistakes:
- Leaving a DLA unpaid across the year end and missing the nine months repayment deadline.
- Treating a write-off as a simple bookkeeping adjustment without checking the personal tax consequences.
- Failing to document formal loans – an undocumented arrangement is more likely to be treated as a distribution and caught by s455.
- Ignoring benefit in kind reporting where low-interest loans exist.
Being proactive with simple controls and documented processes can prevent costly mistakes.
What to do now if you have an overdrawn directors loan account
If you believe you have an overdrawn directors loan account and might face a s455 charge, take these steps quickly:
- Check the company year end and calculate the nine months and one day deadline.
- Review the balance and any transactions that could be set off against the loan.
- Consider immediate repayment options – personal funds, dividend or salary if appropriate.
- Contact a qualified accountant to confirm whether a formal s455 payment is due and to process any reclaim when the loan is repaid.
Our team can help with these steps and with longer-term planning to avoid repeat problems. See our Statutory Accounts & Tax page to find out more.
Useful links and official guidance
For official HMRC guidance on directors loan accounts and the s455 charge see GOV.UK:
This GOV.UK page outlines the HMRC position and practical steps for reporting and repayment.
UK tax and legal accuracy
This article is for informational purposes only and does not constitute professional tax or financial advice. Please speak to a qualified accountant before taking action. Tax year referenced: 2026/27.
Frequently asked questions
What is the difference between an overdrawn directors loan account and a normal loan?
An overdrawn directors loan account records amounts a director owes the company that are not salary, dividends or expenses. A formal loan will usually have written terms, interest and a repayment schedule which can help demonstrate a commercial arrangement.
How long do I have to repay a directors loan to avoid the s455 charge?
The company must receive repayment before nine months and one day after the end of the company accounting period to avoid the section 455 charge for that period.
If the company pays the s455 charge can it get the tax back?
Yes. Generally the company can reclaim the s455 tax when the loan is repaid, subject to HMRC rules and appropriate documentation. Speak to your accountant to process the reclaim correctly.
Are there personal tax consequences for me if the loan is written off?
Writing off a directors loan can create a taxable distribution or employment income for the director, and this can produce personal tax and National Insurance liabilities. Always get advice before writing off any loan.
Can I avoid s455 by charging interest on the loan?
Charging a commercial market rate of interest and documenting the loan as a genuine commercial arrangement can reduce the risk that HMRC treats the advance as a disguised distribution. However, the s455 test is based on whether a loan remains outstanding, so interest alone does not prevent the timing test applying.
Summary and next steps
Section 455 directors loan UK rules are a common issue for small companies. The key takeaways are simple:
- Monitor your directors loan account regularly and keep clear records.
- Repay before nine months and one day after the accounting period end to avoid the DLA tax charge.
- If a charge is paid, the company can normally reclaim it when the loan is repaid, but reclaim procedures and timing can be complex.
If you need help reviewing a DLA, modelling repayment options or reclaiming s455 tax, speak to Figures. Book a call with us today to discuss your circumstances and next steps: book a discovery call.
If you want practical help with bookkeeping or payroll while you sort DLA issues, see our Bookkeeping & Xero and Statutory Accounts & Tax services.