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A close company that lends money to a director and is not repaid within 9 months of its year end pays section 455 tax at 35.75% of the outstanding balance on loans made from 6 April 2026 [5]. Once the balance owed by a director-employee goes above £10,000 at any point in the tax year, the loan also becomes a reportable benefit in kind with Class 1A National Insurance attached [14].
A directors loan account (DLA) is the running record of money that moves between a company and its directors outside salary, dividends and expense repayments [1]. It looks like a bookkeeping matter, and most of the time it is one. The moment the account is overdrawn, though, it touches three separate tax regimes at once: corporation tax, employment income and National Insurance.
That overlap is why the directors loan account sits on the payroll desk as much as the accounts desk. A loan written off has to go through payroll for Class 1 National Insurance, a cheap loan has to go on a P11D, and withdrawals that are really earnings have to be taxed when they are taken [15] [23].
This guide explains what goes into a directors loan account, how section 455 works, the benefit in kind rules for loans above £10,000, the payroll treatment of write-offs, and the company law approvals that apply. It is written for owner-managed companies and the accountants and payroll bureaux that run their payroll.
Key takeaways
- A director's loan is money a director (or close family member) takes from the company that is not salary, a dividend, an expense repayment or a return of money the director put in [1].
- An overdrawn balance not repaid within 9 months of the end of the accounting period triggers section 455 tax, at 35.75% for loans made from 6 April 2026, reclaimable once the loan is repaid [5] [2].
- Loans above £10,000 at any time in the tax year are a benefit in kind, valued at the official rate of interest (3.75% for the 2026-27 tax year) and reported on a P11D with Class 1A National Insurance [17] [15].
- A loan written off for a director-employee attracts Class 1 National Insurance through payroll, but not PAYE income tax [15] [22].
- Repaying a loan and re-borrowing within 30 days does not avoid section 455 where both amounts are £5,000 or more [8].
What a directors loan account is
GOV.UK defines a director's loan as money a director, or a close family member, gets from the company that is not a salary, dividend or expense repayment, and not money the director previously paid into or loaned to the company [1]. The company must keep a record of any money a director borrows from or pays into it, and that record is the directors loan account [1] [4].
What goes in and out of the account
The account moves in both directions. Personal bills paid by the company, cash drawn ahead of a dividend and private purchases on a company card are debits. Money the director lends to the company, unpaid salary voted but not drawn, and dividends credited but not paid are credits. HMRC's own guidance on employee loans specifically covers "charging a director's personal bills to their loan account within the company" [13].
HMRC's National Insurance Manual lists the typical entries, including remuneration voted and loans to the director, and treats the account as a record that HMRC will examine line by line when deciding how each withdrawal should be taxed [24] [23].
| Entry | Effect on the account | Typical tax consequence |
|---|---|---|
| Director pays personal bills from the company account | Debit (director owes more) | May become an overdrawn loan |
| Director lends personal funds to the company | Credit (company owes the director) | No corporation tax on the loan itself |
| Salary voted but not drawn | Credit | PAYE and NI already due on the salary |
| Dividend declared but not paid | Credit | Dividend tax for the director |
| Regular cash withdrawals with no paperwork | Debit | HMRC may treat them as earnings |
Overdrawn and in credit
A directors loan account is overdrawn when the director owes the company money and in credit when the company owes the director. The balance at the year end goes on the balance sheet in the annual accounts either way [1]. An overdrawn account is the one that creates tax charges; an account in credit is, in tax terms, a simple debt the company can repay at any time [3].
The director information hub on GOV.UK adds a point that owner-managers often overlook: if the company goes into liquidation, the director may have to repay any director's loans taken, so that creditors can be paid [4]. An overdrawn account is therefore a real debt, not a notional book entry [2].
Section 455: the company's tax on overdrawn loans
Section 455 of the Corporation Tax Act 2010 charges a close company tax when it lends money to a participator, typically a shareholder-director, or an associate [6]. It is not a tax on profits: it is a temporary charge on the loan itself, which the company gets back when the loan is cleared [2].
The rate and how it is set
The section 455 rate is linked by statute to the dividend upper rate in section 8(2) of the Income Tax Act 2007 [6]. When the dividend upper rate changes, the section 455 rate follows for loans made in the tax year concerned [5]. The dividend upper rate for 6 April 2026 to 5 April 2027 is 35.75% [7].
| Date the loan was made | Section 455 rate |
|---|---|
| Up to 5 April 2016 | 25% |
| 6 April 2016 to 5 April 2022 | 32.5% |
| 6 April 2022 to 5 April 2026 | 33.75% |
| From 6 April 2026 | 35.75% |
The rates in the table come from HMRC's Company Taxation Manual [5]. The rate is applied loan by loan according to the date each advance was made, so an account built up over several years can carry balances charged at different rates [5] [2].
When the charge bites and when it is due
No section 455 tax arises if the loan is repaid within 9 months of the end of the corporation tax accounting period in which it was made [2]. If it is still outstanding after that point, the company pays the charge on the outstanding amount and reports the loan on the supplementary pages CT600A of its Company Tax Return [2].
The tax is due on the day after the end of the 9 months following the accounting period [6], which aligns it with the normal corporation tax deadline of 9 months and 1 day [11] [10]. Interest runs on unpaid section 455 tax until the tax is paid or the loan is repaid [2]. HMRC's late payment interest is set at base rate plus 4% from 6 April 2025, and stood at 7.75% from 9 January 2026 [12].
A worked section 455 example
A company with a 31 March year end lends its shareholder-director £40,000 during the year, and the full balance is still outstanding the following 1 January. At 35.75%, the section 455 charge is £14,300, payable with the corporation tax for that period [5] [11].
If the director had repaid £25,000 before 1 January, only the £15,000 still outstanding would be charged, giving £5,362.50 at the same rate [2] [5]. The example shows why the 9-month window matters more than the size of the loan.
Getting section 455 back
Section 455 tax is refundable, but not quickly. Where a loan is repaid, released or written off within 9 months of the end of the period in which it was made, relief is immediate. Where the repayment comes later, relief is deferred to the due date for the accounting period in which the repayment happens [10] [27].
In practice, a company claims after relief becomes due, 9 months and 1 day after the end of the accounting period in which the loan was repaid, and it must claim within 4 years [2]. The claim goes on form CT600A within 2 years of the period the loan was made in, or on form L2P after that. Interest paid on the section 455 tax is never refunded [2].
The 30-day rule and other anti-avoidance rules
The obvious workaround, repaying the loan just before the deadline and drawing it out again shortly afterwards, has been closed by legislation [9]. HMRC calls the practice "bed and breakfasting", and the relevant legislation is section 464ZA of the Corporation Tax Act 2010 [8].
The 30-day rule
The 30-day rule is mechanical. It applies where, within any 30-day period, there are repayments totalling £5,000 or more and new loans totalling £5,000 or more made after the end of the accounting period [8]. The repayments are matched against the new loans, and relief is only given for any excess [8] [2].
The arrangements rule for larger loans
A second rule applies to loans over £15,000. If, at the time of repayment, the director had arranged or intended to take another loan, section 455 is charged on the original loan even if the 30-day window is not met [2]. Once the original loan is permanently repaid, the company can reclaim the tax, but not the interest [2] [9].
| Rule | Loan size | Trigger | Result |
|---|---|---|---|
| 30-day rule | Repayments and new loans of £5,000 or more | New borrowing within 30 days of a repayment | Repayment matched to the new loan, no relief |
| Arrangements rule | Loan over £15,000 | Further loan arranged or intended when repaying | Section 455 charged on the original loan |
Repayments that genuinely clear the account do not fall foul of either rule. Clearing an overdrawn balance by voting a bonus or declaring a dividend is a real repayment, because it is taxed as income in the director's hands [8] [21].
Benefit in kind: loans above £10,000
The second tax regime is employment income. A director is an employee for tax purposes, so an interest-free or cheap loan is an employment-related benefit [19]. The benefit is the difference between the interest the director pays, if any, and interest at HMRC's official rate [19] [13].
The £10,000 threshold
No benefit charge arises when the combined outstanding loans to an employee stay under £10,000 throughout the whole tax year [14]. The threshold is in section 180 of the Income Tax (Earnings and Pensions) Act 2003 [18]. The test is "at all times", so a single day above £10,000 brings the whole loan into charge for the year.
The exemption list also covers a directors loan account that is never overdrawn during the tax year, loans made in a normal domestic or family relationship rather than by the company, and loans on terms offered to the general public [14]. A cheap loan from the company to a director's relative is normally taxable on the director, and HMRC states that the "no benefit" exemption for relatives will only rarely apply in a director-controlled company [29].
Valuing the benefit
The official rate of interest is 3.75% from 6 April 2026, unchanged from the 2025-26 tax year [17]. The cash equivalent can be worked out in payroll software, through PAYE Online, or on HMRC's P11D working sheet 4 [16].
A director borrows £30,000 interest-free from the company and owes the full amount for the whole tax year. At 3.75%, the benefit is £1,125. At the Class 1A rate of 15%, the company pays £168.75 of Class 1A National Insurance on that benefit [17] [15]. A director paying higher rate tax at 40% pays £450 of income tax on the £1,125 benefit [28].
Reporting and paying
A beneficial loan that is not exempt goes on the director's P11D, and the employer pays Class 1A National Insurance on the value of the benefit [15]. The P11D and P11D(b) are due by 6 July after the end of the tax year, and Class 1A must be paid by 22 July, or 19 July if paying by cheque [20].
A late P11D(b) carries a penalty of £100 per 50 employees for each month or part month it is late [20]. Many owner-managed companies have no other benefits to report, so the directors loan account is the item that brings them into the P11D cycle at all.
Writing off a director's loan: the payroll angle
A company can choose to release or write off a director's loan instead of collecting it. The director then has nothing to repay, but the release is taxable, and it is the point at which the directors loan account lands squarely in payroll [15].
Income tax and National Insurance on a write-off
For a shareholder-director, the amount written off is included in total income under section 415 of the Income Tax (Trading and Other Income) Act 2005, and the director pays the tax through Self Assessment [21] [2]. The company, for its part, can reclaim any section 455 tax it paid on the loan [2].
National Insurance follows a different route. Where the director is also an employee, the amount released attracts Class 1 National Insurance as earnings from the employment, a position confirmed by the First-tier Tribunal in Stewart Fraser Ltd v HMRC [22]. HMRC's guidance is explicit: the employer deducts and pays Class 1 National Insurance, but not PAYE tax, and also reports the write-off on the P11D [15].
A worked write-off example
A director on an annual salary of £12,570 has a £20,000 loan written off. On the salary alone, there is no employee National Insurance and employer National Insurance of £1,135.50 [22] [15].
With the £20,000 write-off added to earnings for National Insurance, total NIable pay is £32,570. Employee National Insurance becomes £1,600 and employer National Insurance rises to £4,135.50 [22] [15]. The figures are for a category A director, and the income tax on the write-off is settled separately through Self Assessment.
The employee National Insurance cannot always be taken from the director's net pay in the same period, because the write-off produces no cash. Payroll software therefore needs to treat the write-off as a non-cash NIable payment, so that the Full Payment Submission reports the right earnings while net pay stays correct. The UK payroll software used for the director's payroll should support that kind of payment type.
Withdrawals that are really salary
Not every debit on a directors loan account is a loan. HMRC states that it is always a question of fact whether a withdrawal is a loan, earnings or a payment on account of earnings [23]. A regular pattern of withdrawals from an overdrawn account, later cleared by remuneration voted, is a strong indication that the withdrawals were earnings all along [23] [24].
Where the directors own all the shares and decide that withdrawals are earnings, HMRC expects PAYE and National Insurance to be applied at the time of the withdrawal, not at the year end [23]. For a company that pays its director a low salary, the practical answer is to run the director through payroll on a regular schedule, as set out in the Moonworkers guide to company director payroll, rather than letting drawings build up on the account.
Clearing an overdrawn account
An overdrawn directors loan account can be cleared in four ways, and each has a different tax profile. The choice usually comes down to the company's distributable reserves, the director's marginal tax rate and timing against the 9-month deadline [2] [21].
| Route | Company side | Director side | Payroll involvement |
|---|---|---|---|
| Repay in cash | Section 455 avoided or refunded | No tax | None |
| Declare a dividend and credit the account | Needs distributable reserves | Dividend tax | None |
| Vote a bonus and credit the account | Corporation tax deduction for the bonus | PAYE and Class 1 NI | Full PAYE and NI through the FPS |
| Write off the loan | Section 455 refunded | Income tax via Self Assessment | Class 1 NI through payroll, P11D |
The dividend tax rates for 6 April 2026 to 5 April 2027 are 10.75% at basic rate, 35.75% at higher rate and 39.35% at additional rate, with a £500 dividend allowance [7]. A bonus is taxed at the director's income tax rates and attracts employer National Insurance at 15% above the secondary threshold [28]. The Moonworkers guide to director salary and dividends compares the two routes in more detail.
Company law approvals
Tax is only half of the compliance picture. Under section 197 of the Companies Act 2006, a company may not make a loan to one of its directors unless the transaction has been approved by a resolution of the members [25]. A memorandum setting out the nature, amount and purpose of the loan must be made available to members before the vote [25].
Approval is not needed where the aggregate value of loans to the director does not exceed £10,000, and a separate £15,000 limit applies to credit transactions [26]. In a one-person company the director and the sole member are the same person, but the resolution still needs to exist on paper [25] [4].
When the director lends to the company
The account can also run the other way. A director who lends money to the company creates a credit balance, and the company pays no corporation tax on the money it receives [3]. If the director charges interest, the interest is a business expense for the company and personal income for the director, reported through Self Assessment [3].
The company must pay the interest net of income tax at the basic rate of 20%, and report and pay that tax to HMRC every quarter on form CT61 [3]. This is one of the few situations where a small company acts as a withholding agent outside payroll, and it is easy to miss when the loan was informal [1].
Why the directors loan account belongs in the payroll workflow
Most directors loan account errors come from the gap between bookkeeping and payroll. The accounts system knows the balance, but the payroll system is the one that has to report the write-off, apply National Insurance to withdrawals that are earnings, and feed the P11D [15] [23].
For accountants handling dozens of owner-managed companies, a multi-client payroll dashboard keeps director payrolls, write-offs and P11D figures visible in one place. For software platforms that already hold the ledger, an HMRC-recognised payroll API lets the loan balance, the National Insurance on a write-off and the year-end benefit report flow from one system instead of being retyped. Moonworkers is HMRC Recognised, and its engine applies the 2026-27 National Insurance thresholds and the 15% employer rate used in the examples above. The wider mechanics of the employer rate are covered in the guide to employer National Insurance.
Check the National Insurance cost of a director's pay
A director deciding how much to draw through payroll can test the National Insurance and income tax cost of any salary with the Moonworkers UK salary calculator, which applies the 2026-27 PAYE and National Insurance rules.
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About this calculator
This calculator gives you a close estimate of your UK payroll deductions for 2026-27, using HMRC's exact percentage method with periodised thresholds. It handles the three tax territories, K codes with the 50% regulatory limit and its carry-forward, weeks 53, 54 and 56, the cumulative and W1/M1/X bases, student and postgraduate loans, and pension contributions on qualifying earnings. It still won't match your payslip to the penny in every case: it does not cover in-year tax code changes, payrolled benefits in kind, NI deferral across more than one employment, directors on the annual earnings period, or employer-level annual adjustments such as the Employment Allowance and the apprenticeship levy. Powered by the same engine as the Moonworkers Payroll API.
Frequently asked questions
Why might the result differ from my payslip?
This calculator uses your current gross pay and tax code to produce an estimate. K-code carry-forwards and weeks 53, 54 and 56 are handled, and the Year-to-date section reproduces a specific period exactly. What your employer may apply that this does not: a mid-year tax code change, benefits in kind processed through payroll, or NI deferral across more than one employment. For most employees on a standard tax code the difference is negligible.
What tax code should I enter?
Use the tax code shown on your most recent payslip or the PAYE Coding Notice (P2) from HMRC. If you're not sure, 1257L is the standard code for most employees resident in England, Wales, or Northern Ireland. Use S1257L for Scotland or C1257L for Wales if you pay Scottish or Welsh income tax.
Which NI category applies to me?
Most employees use Category A. Use M if you are under 21, H if you are an apprentice under 25, or C if you are over State Pension age. Your employer is responsible for assigning the correct category — if in doubt, check your payslip.
Which student loan plan am I on?
Your plan depends on when and where you studied. Plan 1 covers students who started before September 2012. Plan 2 is for English and Welsh students who started from September 2012 to July 2023. Plan 5 applies to English students who started from August 2023. Plan 4 covers Scottish students. You can check your plan at gov.uk or on your payslip.
What is the YTD cumulative PAYE mode?
HMRC's standard method calculates income tax on your total earnings to date each period, then subtracts tax already paid. If you're mid-year and want to see exactly what tax should be deducted in a specific period, expand the Year-to-date section and enter your running totals from previous periods only.
Conclusion
The directors loan account sits where three tax codes meet. Corporation tax decides whether the company pays a temporary 35.75% charge, employment income rules decide whether a loan above £10,000 is a benefit, and National Insurance decides whether a write-off or a pattern of withdrawals is really pay. Each regime has its own deadline: 9 months and 1 day for section 455, 6 July for the P11D, and the payday itself for withdrawals treated as earnings.
As HMRC joins up corporation tax, Self Assessment and payroll data, a directors loan account that is reconciled only once a year is becoming harder to defend. Companies that record each movement as it happens, and route the payroll consequences through the same system, will find that the 9-month deadline stops being a year-end scramble and becomes a routine check.
Frequently asked questions
Is a directors loan account overdrawn at the year end always taxed?
No. Section 455 tax only applies if the balance is still outstanding 9 months after the end of the accounting period [2]. A balance cleared by repayment, a dividend or a bonus within that window produces no section 455 charge, provided the 30-day and arrangements rules do not apply [8]. A separate benefit in kind charge can still arise if the loan was above £10,000 at any point in the tax year [14].
Does a director pay tax on an interest-free loan under £10,000?
No benefit in kind arises if the total loans outstanding to the director stay under £10,000 at all times in the tax year [18]. The company can still owe section 455 tax on the balance if it is not repaid within 9 months of the year end, because that charge has no minimum amount [6].
Can a company write off a director's loan without going through payroll?
Not if the director is an employee. A written-off loan to a director-employee attracts Class 1 National Insurance, which must be deducted and paid through payroll, and the write-off must also be reported on the P11D [15]. The income tax on the amount is paid by the director through Self Assessment rather than through PAYE [2].
How long does it take to get section 455 tax back?
Relief is due 9 months and 1 day after the end of the accounting period in which the loan is repaid, released or written off, and HMRC will not repay before that date [2]. A loan repaid shortly after the deadline can therefore leave the tax with HMRC for well over a year. The claim must be made within 4 years, and interest paid on the tax is not refunded [2].
