Director's Loan Account Explained for Small Companies

A director's loan account is the record of money moving between you and your company that is not salary, dividends or reimbursed business expenses. If you take out more than you put in, you owe the company money — and if that is still true nine months after the year end, the company faces an extra tax charge.

Most directors of small companies have a loan account whether they know it or not, because it builds up from ordinary things: a personal bill paid on the company card, a transfer to cover a short-term gap, drawings taken before dividends were declared. This guide explains how it works, when it costs money, and how to keep it under control.

Key takeaways

• The loan account tracks money between you and the company other than salary, dividends and expense claims.
• An overdrawn account at the year end triggers a temporary company tax charge if not repaid within nine months and one day.
• The charge is refundable once the loan is repaid, but only after a waiting period.
• Larger loans can create a taxable benefit in kind for the director.
• Repaying and immediately re-borrowing is caught by anti-avoidance rules.

What a director's loan account is

A limited company is a separate legal person from its directors. Its money is not your money, even if you own all the shares. So when money moves between you and the company, it has to be classified. Salary goes through payroll. Dividends are declared from profits. Legitimate business expenses you paid personally can be reimbursed. Anything else goes to the director's loan account.

The account can be in credit, where the company owes you, or overdrawn, where you owe the company. HMRC's summary of the rules is on GOV.UK's director's loans guidance.

In credit versus overdrawn

When an overdrawn account costs money

If your loan account is overdrawn at the end of the company's accounting period, and the balance is not repaid within nine months and one day of that year end, the company must pay an additional amount of Corporation Tax on the outstanding balance. This is commonly called section 455 tax.

It is temporary. When the loan is later repaid, released or written off, the company can claim it back. But the refund is not immediate: it becomes available only after a period linked to the accounting period in which the repayment was made. So even a charge you will eventually recover can tie up company cash for a long time. Check the current rate and reclaim rules on GOV.UK's page on owing your company money.

Separately, if the loan goes above a set threshold at any point in the tax year and you pay less than HMRC's official rate of interest, it can count as a benefit in kind. That must be reported, and it creates tax for you and National Insurance for the company. Loans of that size may also need shareholder approval.

Why repaying and re-borrowing does not work

A tempting idea is to repay the loan just before the deadline and take the money out again shortly after. Anti-avoidance rules, often called bed and breakfasting rules, can disregard a repayment where a similar amount is borrowed again within a short period, or where there was an arrangement to do so. The honest route is the reliable one: clear the balance with money that has been properly taxed, such as a dividend lawfully declared from available profits, or a bonus put through payroll.

Step by step: keep your loan account under control

1. Use a separate company bank account and card, and keep personal spending off them.
2. Code every payment to you as salary, dividend, expense claim or loan account — never leave it unallocated.
3. Check the loan account balance monthly, not just at the year end.
4. Declare dividends properly, with board minutes and vouchers, before or when you take the money.
5. Three months before your year end, review the balance and plan how any overdrawn amount will be cleared.
6. Diarise the date nine months and one day after the year end as the repayment deadline.
7. Keep a note of any money you lend the company, so a credit balance can be evidenced later.

Worked example (illustrative example)

"Rowan", an invented illustrative example, is the sole director and shareholder of a small consultancy with a 31 March year end. During the year Rowan took regular transfers from the company account, intending them as dividends, but no dividends were ever formally declared. Rowan also paid for a family holiday on the company card.

At 31 March 2026 all of that sat in the director's loan account, which was overdrawn. The accountant flagged it when preparing the accounts. Rowan had until 1 January 2027 — nine months and one day after the year end — to clear the balance before the company would face the temporary extra tax charge.

The company had sufficient retained profits, so the board declared a dividend properly, and the dividend was credited against the loan account to clear it. Rowan then paid the resulting personal tax through Self Assessment in the normal way. No extra company charge arose, and from April 2026 Rowan declared dividends quarterly before taking the money. Rowan and the figures are invented to show the mechanics; your own position depends on your company's profits and paperwork.

Common mistakes

• Taking "dividends" that were never declared. Without proper paperwork and available profits, they are loans.
• Paying personal bills from the company account. Each one adds to the loan balance.
• Only looking at the balance at the year end. By then your options are narrower.
• Declaring dividends without enough profit. Dividends can only lawfully be paid from available distributable profits.
• Relying on repay-and-re-borrow. Anti-avoidance rules can ignore the repayment.

Getting it handled

Our limited company packages start from £75 per month and include keeping your loan account reconciled through the year, so it does not become a year-end surprise. Accounts preparation is also available on its own through our company accounts service from £350 per year. The nine-month deadline is the same one that governs Corporation Tax payment — see company accounts deadlines from your year end — and the extra charge is separate from the main rate discussed in Corporation Tax marginal relief explained.

Worried your loan account is overdrawn? Get in touch and we will review it with you.