Director’s Loan Account Explained: Rules, Tax and Common Mistakes

Running a limited company often means directors need to move money between themselves and the business. However, not every withdrawal is a salary or dividend. A directors loan account records these transactions and shows whether the director owes money to the company or the company owes money to the director.

Understanding how a director’s loan account works is especially important when the balance becomes overdrawn, as this can create tax and reporting considerations, including S455 tax. In this guide, Top Bookkeeping Services explains the key rules, a worked S455 tax calculation, common mistakes and practical ways to manage the account correctly.

Worked S455 tax calculation at a glance

If a close company makes a £20,000 loan to a shareholder-director on 1 May 2026 and the relevant amount remains outstanding beyond the nine-month period following the end of the accounting period, the company could have an S455 liability of £7,150. HMRC confirms that the S455 rate for loans made on or after 6 April 2026 is 35.75%.

What is a director’s loan account?

A director’s loan account tracks financial transactions between a company and its director. It can include money the director withdraws for personal purposes as well as money the director puts into the company. For example, if a director takes £5,000 from the company for a personal expense and that payment is not treated as salary or a valid dividend, it would normally be recorded through the loan account. Likewise, if the director personally pays £3,000 of company expenses, that amount may create a credit balance because the company owes the director.

This distinction matters because taking money from a company does not automatically make it a dividend. HMRC describes a director’s loan as money taken from the company that is not salary, a dividend, an expense repayment or repayment of money previously loaned to the company. The balance should be maintained accurately throughout the year rather than reconstructed at the year end.

Directors’ loan account rules you need to know

The directors loan account rules depend partly on whether the balance is in debit or credit. If the account is in credit, the company owes money to the director. This can happen when a director injects personal funds into the company. The company generally records this as an amount payable to the director.

If the account is overdrawn, the director owes money to the company. This is where the tax and compliance issues can become more significant. For a close company, a loan to a shareholder-director can potentially fall within S455 tax rules under CTA 2010 Section 455. HMRC’s Company Taxation Manual explains that S455 applies to loans or advances made by a close company to participators, subject to the relevant exclusions and relief provisions.

Another important point is that the loan remains a company asset. It is not simply the director’s money because they are a shareholder or director. The Insolvency Service specifically notes that money borrowed remains the company’s property and has to be repaid.

When does S455 tax apply?

S455 tax is particularly relevant where a close company lends money to a participator, which commonly includes a shareholder-director.

For loans made on or after 6 April 2026, HMRC’s published guidance states that the S455 rate is 35.75%. The rate was 33.75% for loans made on or after 6 April 2022 and before 6 April 2026.

The tax is charged on the company rather than simply being treated as the director’s personal Income Tax bill.

HMRC guidance also confirms that S455 liabilities are included in the company’s Corporation Tax return.

Full worked S455 tax example

Suppose ABC Consulting Ltd is a close company and its shareholder-director withdraws £20,000 on 1 May 2026.

The amount is recorded in the directors’ loan account. Assume the £20,000 is still outstanding after the relevant nine-month period following the company’s accounting period end.

The calculation is:

£20,000 × 35.75% = £7,150

Therefore:

• Loan outstanding: £20,000
• Applicable S455 rate: 35.75%
• S455 liability: £7,150

The £7,150 is not a permanent additional tax cost in every case. Where the loan is subsequently repaid, released or written off, the company may be able to claim relief under CTA 2010 Section 458, subject to the legislation and applicable timing rules. HMRC explains this relief in CTM98205 and related guidance.

The key practical lesson is that a large overdrawn balance can create a significant temporary cash-flow cost for the company.

What is an overdrawn directors’ loan account?

An overdrawn directors loan account exists when the director has taken more from the company than they have put into it or otherwise become entitled to receive.

For example:

• Director puts £10,000 into the company.
• The director later withdraws £25,000 for personal use.
• Net balance owed to the company = £15,000.

That £15,000 should not simply be ignored because the director is also a shareholder.

The overdrawn directors loan account should be reconciled and reviewed before the company accounts and Corporation Tax return are prepared.

There can also be personal tax implications. HMRC states that where a director or employee receives a beneficial loan, the employment benefits rules can potentially apply. HMRC’s guidance also distinguishes this from the company’s S455 liability.

The £10,000 beneficial-loan issue

A common misunderstanding is that £10,000 is the point at which S455 tax starts. It is not.

The £10,000 figure is relevant to the separate beneficial-loan rules for the individual. HMRC’s guidance explains that additional tax responsibilities can arise where the loan exceeds £10,000 or where interest is charged below the official rate.

So a director should consider two different questions:

1. Does the loan create an S455 liability for the company?
2. Does the loan create a taxable benefit for the director?

These are related but separate tax considerations.

Common directors loan account mistakes

Directors loan accounts can create tax and accounting issues when transactions are not recorded or handled correctly. Here are some common mistakes to avoid:

• Treating withdrawals as dividends automatically
  A dividend must be properly declared and supported by sufficient distributable profits. Simply taking money from the company does not automatically make it a dividend.
• Ignoring personal expenses
  Company-paid personal expenses should be recorded correctly, often through the directors loan account or as remuneration or benefits where appropriate.
• Waiting until the year end
  Reconstructing the balance later can lead to missing transactions, incorrect dividends and inaccurate S455 calculations. Reconciling the account monthly is a better approach.
• Assuming repayment always eliminates the issue
  Repayment can change the tax position, but timing and circumstances matter. HMRC has specific rules covering repayments and anti-avoidance provisions.
• Forgetting the company tax return
  Where applicable, S455 information must be reported through the company’s Corporation Tax return, including CT600A where required.

How to manage your directors loan account properly

A simple process can help keep your directors loan account accurate and reduce the risk of unexpected tax issues:

Step 1: Record every transaction.
Keep clear records of personal withdrawals, repayments, personal expenses paid by the company and company payments made on your behalf.

Step 2: Reconcile regularly.
Review the account regularly rather than waiting until the year-end accounts are prepared.

Step 3: Separate salary, dividends and loans.
Record each payment correctly because salary, dividends and loans have different accounting and tax treatments.

Step 4: Monitor the balance.
Keep an eye on any increasing debit balance so potential tax or cash-flow issues can be addressed early.

Step 5: Check the tax position before year end.
Review whether S455 tax or beneficial-loan rules may apply based on the outstanding balance and circumstances.

Step 6: Document repayments.
Keep clear evidence of repayments, including the amount and date, to support the company’s accounting and tax records.

Conclusion

A directors loan account is more than just a bookkeeping entry. An overdrawn balance can create Corporation Tax consequences for the company, possible benefit-in-kind implications for the director and additional reporting requirements. The key is to keep the account reconciled throughout the year, distinguish loans from salary and dividends, monitor personal withdrawals and review the S455 position before the company’s Corporation Tax return is submitted.

If you need help keeping your records accurate and your director transactions properly organised, Top Bookkeeping Services can support your bookkeeping needs and help make the year-end accounting process more straightforward. Understanding the balance early and dealing with it correctly can help directors avoid unexpected tax issues and maintain accurate company records.

Frequently asked questions

Is a directors loan account mandatory?

Companies must keep proper records of money directors borrow from or pay into the company. A directors loan account is commonly used to record these transactions.

Does every director’s loan attract S455 tax?

No. S455 applies in specific circumstances, particularly where a close company lends money to a participator. Exemptions and reliefs may apply depending on the circumstances.

What happens if I repay the loan?

Repayment reduces or clears the outstanding balance. In certain circumstances, the company may also claim relief from S455 tax under Section 458.

Can a director lend money to their company?

Yes. Money personally lent by a director can be recorded as a credit balance in the loan account. Interest paid by the company may have tax consequences.

What should I do if my loan account is overdrawn?

First, confirm the balance and how it arose. Then consider repayment, a properly supported dividend, or another appropriate accounting treatment.