Director's Loan Accounts: The Hidden Tax Trap for Directors

Director's loan accounts (DLAs) are a common but often misunderstood aspect of running a UK company. Many directors, including those advised by Chris Worden at Director First, find themselves facing unexpected tax bills and personal liabilities due to overdrawn DLAs. This article explains what DLAs are, why HMRC is targeting them, and how to avoid costly mistakes.

What is a Director's Loan Account?

A director's loan account records money moving between you and your company that isn't salary or declared dividends. Common reasons for overdrawn DLAs include paying personal bills with company funds, taking cash advances, or using company money between dividend declarations.

Why HMRC Cares About DLAs

HMRC sees DLAs as a potential way for directors to extract money from their companies without paying the correct tax. In 2026 and beyond, HMRC is laser-focused on these accounts, especially for small and close companies (private companies controlled by five or fewer shareholders or directors).

Section 455 Tax Explained

If your DLA is overdrawn and not repaid within nine months of your company year-end, HMRC charges the company a Section 455 tax at 33.75% of the outstanding loan. This tax is refundable only if the loan is repaid, but if the company becomes insolvent, the refund is usually lost.

Personal Tax Implications

• If your loan exceeds £10,000 and you don't pay interest at HMRC's official rate, you may face a benefit-in-kind charge and additional National Insurance.
• If the loan is written off, HMRC can tax it as a dividend, leading to further personal tax liabilities.

Anti-Avoidance Rules

HMRC has rules to prevent directors from repaying and immediately re-borrowing funds (known as "bed and breakfasting"). If you repay a loan and borrow again within 30 days, HMRC treats it as never repaid. Even outside 30 days, if there's an understanding the money will be re-borrowed, relief can be blocked.

DLAs in Insolvency

In insolvency, an overdrawn DLA is an asset the liquidator must pursue. Insolvency practitioners will assess your means and may seek repayment, potentially leading to bankruptcy if you have significant assets. Even if written off, HMRC can still tax the amount as income.

How to Manage Director's Loan Accounts

• Track your DLA monthly using accounting software and a good bookkeeper.
• Clear any overdrawn loan within nine months of your year-end.
• Only pay dividends from genuine reserves.
• Charge interest on loans over £10,000 if required.
• Never assume insolvency makes the problem disappear.
• Get professional advice early, ideally before HMRC gets involved.

Key Takeaways

• DLAs can create significant tax and personal risks for directors.
• Section 455 tax is costly and often overlooked.
• Written-off loans can result in personal tax bills even after insolvency.
• Early, proactive management is crucial—seek advice from experts like Chris Worden at Director First.

FAQs

What is a director's loan account?

A director's loan account records money moving between a director and their company that isn't salary or declared dividends.

What is Section 455 tax?

Section 455 tax is a 33.75% charge on overdrawn director's loan accounts not repaid within nine months of the company year-end.

Can HMRC tax a written-off director's loan?

Yes, HMRC can tax a written-off director's loan as a dividend, resulting in personal tax liabilities.

What happens to a DLA in insolvency?

In insolvency, the liquidator will pursue repayment of any overdrawn DLA, and HMRC may still tax any written-off amounts.

How can I avoid DLA problems?

Track your DLA monthly, clear loans promptly, only pay dividends from profits, and seek early professional advice.

Need help with a director's loan account or facing HMRC pressure? Contact us today for expert advice from Director First.