Director's Loan Accounts and S455 Tax — What You Need to Know

A director's loan account (DLA) records money you take from your company beyond your salary and declared dividends, as well as any personal funds you put in. If the account goes overdrawn — meaning you owe the company more than it owes you — this can trigger additional tax.

What Happens If the DLA Is Overdrawn?

If your DLA is still overdrawn nine months after your company's accounting year end, HMRC charges additional corporation tax under Section 455 (S455) of the Corporation Tax Act 2010. The S455 rate is currently 33.75% of the overdrawn balance — the same as the higher rate of dividend tax.

The S455 charge is refundable once the loan is repaid, but the refund can take up to nine months after repayment to arrive from HMRC, creating a significant cashflow cost.

How Does a DLA Become Overdrawn?

Common causes include:

Withdrawing cash or making personal payments through the company before there are enough reserves to declare a dividend
Paying personal expenses through the company account without a corresponding salary or dividend
Not keeping bookkeeping up to date, so the position is only discovered at year end

Quarterly bookkeeping reviews give you visibility before the problem becomes a tax bill.

Watch Out for "Bed and Breakfasting"

Some directors try to clear an overdrawn DLA just before the deadline and then borrow again shortly afterwards. HMRC's anti-avoidance rules (known as the 30-day rule) counter this: if you repay an overdrawn DLA of £5,000 or more and then borrow £5,000 or more within 30 days, the repayment is matched against the new borrowing and the S455 charge still applies.

How to Avoid an S455 Charge

The most reliable approach is to know your distributable reserves before withdrawing money. If reserves are sufficient, declare and minute a dividend to cover the withdrawal. If they are not, consider whether the withdrawal should go through payroll as salary.

A rolling quarterly review of your DLA balance alongside your corporation tax provision prevents surprises at year end. Our bookkeeping service includes regular management accounts so you always know where you stand.

Frequently Asked Questions

Q: Can I repay the overdrawn DLA before the 9-month deadline? A: Yes — repaying the full overdrawn balance before the 9-month deadline avoids the S455 charge entirely. The deadline is 9 months and 1 day after the company's year end.

Q: Is interest charged on an overdrawn DLA? A: If the loan exceeds £10,000 at any point during the tax year and is not charged at the official HMRC rate, HMRC treats the difference as a taxable benefit in kind.

Q: What if I put my own money into the company? A: Money you lend to your company sits on the credit side of the DLA. You can draw it back at any time without tax — it is your own capital being returned, not a dividend or salary.

Need help with this? Contact Liberate Accountants for a free consultation, or learn more about our bookkeeping service.