Director Loan Account

For many owner-managed companies, the director’s loan account is where informal money movements between the director and the company are recorded. It may include personal costs paid by the company, cash withdrawn by the director, repayments made back to the company, or amounts the director has introduced to support the business.

The issue is not that director’s loans are unusual. The risk is that they are often reviewed too late, usually when the accounts and Corporation Tax return are being prepared. By then, the company may already be facing a temporary tax charge, a benefit-in-kind issue, or a director cashflow problem that could have been planned better.

This article is written for UK limited company directors, startup founders, family company owners and small business shareholders who want a practical overview before speaking with an accountant.

What is a director’s loan account?

A director’s loan account records money owed between a director and their company. If the director has taken more from the company than they have put in, and those amounts are not salary, dividends or reimbursed business expenses, the account may become overdrawn.

Common examples include:

• Personal bills paid from the company bank account.
• Cash withdrawals that have not been processed as salary or dividends.
• Dividends taken when the company did not have enough distributable profit.
• Company card spending that includes private costs.
• Director expenses that have not been correctly analysed or reimbursed.

A credit balance means the company owes money to the director. An overdrawn balance means the director owes money to the company. It is the overdrawn position that often creates the biggest tax questions.

Why an overdrawn director’s loan account matters

An overdrawn director’s loan account can affect three areas at the same time: the company accounts, the Corporation Tax return and the director’s personal tax position. This is why it should not be treated as a simple bookkeeping adjustment at year end.

If the loan is still outstanding at the end of the company’s accounting period, it may need to be disclosed in the accounts and reported with the Company Tax Return. If it is not repaid within the relevant deadline, the company may also face a temporary Corporation Tax charge, often called s455 tax.

The 9 months and 1 day repayment rule

For many small companies, the key date is 9 months and 1 day after the company’s accounting period end. This is also the normal Corporation Tax payment deadline for companies with taxable profits up to £1.5 million.

If an overdrawn director’s loan is still unpaid at that point, the company may have to pay a Corporation Tax charge on the outstanding loan balance. This charge is designed to discourage company owners from using director loans as a substitute for salary or dividends.

The tax may be reclaimed after the loan is permanently repaid, written off or released, but any interest charged by HMRC is not reclaimable. That makes timing important. A loan that is repaid shortly after the deadline can still create avoidable cashflow pressure.

What is s455 tax?

s455 tax is a Corporation Tax charge that can apply where a close company makes a loan to a participator, such as a shareholder-director, and the loan is not repaid on time. For current loans made after 6 April 2022, the charge is 33.75% of the outstanding balance.

For example, if a shareholder-director owes the company £20,000 at the year end and the amount is not repaid within 9 months and 1 day, the company could face a temporary tax charge of £6,750. This is separate from the company’s normal Corporation Tax on profits.

The company usually reports the position using CT600A alongside the Company Tax Return. This is one reason accurate bookkeeping matters: if the director’s loan account is not reconciled properly, the tax return may be wrong.

Watch out for “bed and breakfasting” repayments

Some directors repay a loan shortly before the deadline and then take the money out again soon afterwards. HMRC anti-avoidance rules can restrict this approach where a repayment and new loan are connected.

The practical message is simple: do not assume that a short-term repayment automatically removes the tax risk. If the director needs to borrow from the company again, the timing, amounts and purpose should be reviewed before year end.

Could a director’s loan become a benefit in kind?

Yes. A director’s loan can create a benefit-in-kind issue if it is more than £10,000 at any time in the tax year and interest is not charged at HMRC’s official rate. This can lead to P11D reporting and National Insurance implications for the company.

For the 2026/27 tax year, HMRC’s official beneficial loan rate is 3.75%. If the company charges less than the official rate, the difference may be treated as a taxable benefit. The exact reporting and National Insurance position depends on the facts, including whether the loan is ongoing, repaid, written off or released.

This is where payroll and accounts need to work together. A director’s loan is not just a balance sheet entry; it can also affect P11D reporting, payroll records and the director’s Self Assessment tax return.

Director’s loan account checklist before year end

• Reconcile the director’s loan account before the accounting period ends, not months later.
• Separate salary, dividends, business expenses and personal withdrawals clearly.
• Check whether the company has enough distributable profit before voting dividends.
• Review whether any overdrawn balance can be repaid before the 9 months and 1 day deadline.
• Consider whether the loan exceeded £10,000 at any point in the tax year.
• Check whether interest should be charged at HMRC’s official rate.
• Keep board minutes, dividend vouchers and expense records where relevant.
• Make sure CT600A, P11D and Self Assessment reporting are considered together.

Common mistakes small company directors make

The first mistake is mixing personal and company spending. Even small private costs can build into a sizeable loan balance over a year if they are not reviewed regularly.

The second mistake is assuming every withdrawal can be treated as a dividend. Dividends need sufficient post-tax profit and the correct paperwork. If the company does not have enough distributable reserves, a dividend may need to be reclassified, which can affect the director’s loan account.

The third mistake is leaving the review until the accounts are due. By then, the company may have limited options. A monthly or quarterly review gives directors time to repay, vote lawful dividends, adjust salary, or plan cashflow properly.

How Accusolve Accountants can help

Accusolve Accountants supports UK small businesses, startups and owner-managed companies with practical accounting, bookkeeping, payroll and tax compliance. We can help you understand your director’s loan account before it becomes a year-end problem.

Our support can include:

• Bookkeeping review and director’s loan reconciliation.
• Year-end accounts preparation and balance sheet review.
• Corporation Tax and CT600A reporting support.
• Payroll and P11D coordination where benefits may apply.
• Dividend, salary and cash extraction planning for small company directors.
• Practical reminders for future company tax and filing deadlines.

If you are unsure whether your director’s loan account is overdrawn, or you have received a query from HMRC, it is better to review the position early. A short review can often prevent a larger tax and cashflow issue later.