Understanding how director’s loans work is key for any business owner. While they offer flexibility, failing to apply the correct tax treatment or leaving balances outstanding can lead to unexpected costs.
If you’ve ever taken money out of your company that wasn’t a salary or dividend, you’ve likely used a director’s loan. The Director’s Loan Account (DLA) records both funds you have introduced into the company (a credit) and any amounts you have withdrawn in excess of this (a debit).
Historically, some directors of close companies have used director’s loans to minimise salary and dividends, reducing Income Tax and National Insurance. However, HMRC rules mean this approach can come with tax implications.
If, at the end of the accounting period, the DLA is overdrawn, a Section 455 tax charge may apply.
- For loans made before 6th April 2026, the rate of tax is 33.75%
- For loans made on or after this date, the rate increased to 35.75%
It is important to note that this tax is payable by the company, not the individual. However, the director may still face personal tax consequences. We’ve put together a Spotlight Report setting out the rules surrounding director’s loans, and how to steer clear of the charges. Follow this link to access the report: Directors-loans-how-to-stay-clear-of-unwanted-tax-charges-June-26-1.pdf.
Your questions answered
What happens to the tax if I repay my director’s loan?
If the company has paid the Section 455 tax (currently 35.75%), this is a temporary charge. The company can reclaim the tax once the loan is repaid or written off. Relief can only be claimed 9 months and 1 day after the end of the Corporation tax accounting period. Partial repayments can also lead to partial tax recovery.
What happens if I can’t repay the loan?
If the loan is written off, it is not tax-free. For shareholder directors, the amount of the loan is treated as a dividend and taxed according to your tax band. For employees, this could also give rise to National Insurance and PAYE implications.
Will a director’s loan create a personal tax charge?
Possibly. If the loan balance exceeds £10,000 at any point in the tax year, or the loan is interest-free (or below HMRC’s official rate, currently 3.75%), this can be considered as receiving a beneficial loan benefit. As such, income tax would be payable on the deemed interest, and the company needs to report this as a benefit using a P11D.
It is worth noting this rule applies separately to Section 455.
