Director’s Loan Accounts & Section 455 Tax – Full Guide for Contractors

“It’s not the tax you see coming that hurts your business — it’s the one you didn’t know existed.”

If you’re a contractor running your own limited company, that quote probably hits home. You work hard, win contracts, keep your clients happy — and suddenly HMRC comes knocking with something called Section 455 tax. It sounds technical, but at its heart, it’s about one thing: borrowing money from your own company.

At Zeus Accountants, we’ve helped hundreds of UK contractors navigate this issue. Many were unaware that their Director’s Loan Account (DLA) could quietly build up tax liabilities in the background. In this guide, we’ll walk you through what a DLA actually is, how Section 455 works, what the risks are, and most importantly — how to stay on HMRC’s good side while keeping your cash flow under control.

Let’s break it all down in plain English.

General Understanding of Director’s Loan Accounts

What is a director’s loan account in a limited company?

A Director’s Loan Account (DLA) is, quite simply, a record of all the money transactions between you and your company that aren’t salary, dividends, or expense reimbursements. Think of it as a running total of who owes who — you or the company.

If you take money out of your business and it isn’t for wages or expenses, it’s usually logged as a loan. If you put money into the company — say to cover start-up costs or help with cash flow — that’s the company owing you money.

Over time, these amounts are tracked in your DLA balance. When the company owes you, it’s a credit balance. When you owe the company, it’s overdrawn.

How does a director’s loan account work in practice?

Imagine you’re a contractor running ABC IT Solutions Ltd.

You pay yourself a small salary through PAYE, then take occasional drawings when funds allow. Your accountant records these drawings against your director’s loan account.

At year-end, you might find that you’ve withdrawn £10,000 more than your company has credited you for. That £10,000 becomes an overdrawn DLA — effectively, you owe your company money.

It’s a normal scenario for contractors, but it needs to be handled carefully to avoid triggering extra tax charges under Section 455.

What happens if my director’s loan account is overdrawn?

An overdrawn DLA means you’ve taken more out than you’ve put in. While that’s not illegal, it does have tax consequences.

If that overdrawn amount isn’t repaid within nine months and one day after the end of your company’s accounting period, your company may face a Section 455 Corporation Tax charge of 33.75% of the outstanding balance.

It’s meant to stop directors from taking “temporary” loans to dodge dividend or income tax.

Is a director’s loan the same as taking a dividend or salary?

Not at all. A dividend is a formal profit distribution, subject to dividend tax. A salary goes through PAYE and attracts income tax and National Insurance.

A loan, meanwhile, is meant to be repaid. It’s not income — at least, not at first. But if the loan isn’t repaid or properly managed, HMRC might treat it as if it were income, and tax it accordingly.

At Zeus Accountants, we’ve seen contractors accidentally tip into this territory simply by using their business account like a personal one. The key is keeping the lines clear — what’s yours, what’s the company’s, and how those amounts move between you.

What’s the difference between a director’s loan and an expense reimbursement?

If you pay for legitimate business costs — like a laptop, train ticket, or insurance — and the company reimburses you, that’s not a loan.

The problem arises when personal costs get mixed in — say, using the company card for a family meal or a holiday flight. That’s a personal expense paid by the company, and unless you repay it, it becomes part of your DLA.

Can I lend money to my company as a director?

Absolutely. Many contractors fund their start-up this way.

You might deposit £5,000 of personal savings into your company to help with cash flow. That creates a credit DLA, meaning the company owes you. You can withdraw that money later without tax — it’s simply repayment of your loan.

How is a director’s loan recorded in the company accounts?

Your DLA appears in the balance sheet — usually under “current assets” if the company owes you, or “current liabilities” if you owe the company.

It’s tracked through your bookkeeping system and should be reconciled at year-end. Keeping clean records is crucial. HMRC often asks for DLA statements during compliance checks, especially if your company pays you irregularly.

Section 455 Tax and HMRC Rules

When does Section 455 tax apply?

Section 455 of the Corporation Tax Act 2010 kicks in when a participator (usually a shareholder or director) owes money to their close company, and it’s not repaid within nine months of the year-end.

For contractors, this usually means money withdrawn for personal use that isn’t repaid in time.

How is Section 455 tax calculated?

It’s straightforward — 33.75% of the overdrawn balance.

So, if your DLA is £12,000 overdrawn and not repaid on time, your company owes HMRC £4,050 (33.75% × £12,000).

The good news? It’s not permanent. Once the loan is repaid, the tax can be reclaimed.

Who pays Section 455 tax — the director or the company?

It’s the company’s responsibility to pay the Section 455 tax, even though the director is the one who owes the money.

That’s what often catches contractors off guard — it’s a company tax on your personal borrowing.

When is Section 455 tax due to HMRC?

It’s payable nine months and one day after the end of your accounting period, along with your Corporation Tax return.

Failing to include it can lead to penalties and interest charges.

Can Section 455 tax be avoided legally?

Yes — by repaying the loan before the nine-month deadline or managing your drawings properly throughout the year.

Some contractors clear their DLA with a declared dividend or salary before year-end.

But be careful — HMRC has anti-avoidance rules to stop temporary repayments designed purely to dodge tax.

What happens if the director’s loan is not repaid within 9 months?

The company pays the Section 455 charge. The tax remains with HMRC until the loan is fully repaid. It’s not refundable to the company until then.

Is Section 455 tax refundable if the loan is repaid later?

Yes. Once you repay the loan, the company can reclaim the Section 455 tax.

However, HMRC only refunds it nine months and one day after the end of the accounting period in which the repayment occurred. That can mean a long wait — sometimes more than a year.

How do I reclaim Section 455 tax from HMRC?

You’ll need to submit Form L2P through your Corporation Tax account. HMRC will verify repayment against your DLA records.

Make sure the repayment is clearly documented — including dates and amounts — to avoid delays.

How long does it take to get Section 455 tax refunded?

Typically between 6 to 12 weeks, but it can take longer if records are unclear.

At Zeus Accountants, we’ve helped clients speed this up by providing clear DLA schedules, repayment evidence, and well-structured Corporation Tax returns. HMRC likes clarity — it shortens the queue!

Repayment, Timing, and Compliance

What’s the 9-month rule for director’s loans?

The nine-month rule is the cornerstone of Section 455.

You have exactly nine months and one day after your company’s year-end to clear the overdrawn loan.

So, if your year-end is 31 March 2025, the repayment deadline is 1 January 2026. Simple — but miss it, and you could be paying thousands unnecessarily.

Can I repay a director’s loan and then immediately take another one?

Technically yes, but HMRC’s anti–“bed and breakfasting” rules can stop you.

If you repay £5,000 or more and take out another loan of £5,000+ within 30 days, the repayment is ignored for Section 455 purposes.

What is “bed and breakfasting” of director’s loans?

It’s when directors repay loans just before the nine-month deadline — only to take the same money back out shortly after. HMRC cracked down on this practice in 2013.

They also introduced the arrangements rule: if a new loan is planned while the old one still exists and exceeds £15,000, repayments don’t count.

How can I avoid HMRC penalties for director’s loans?

• Keep a clear record of all money taken from the company.

• Plan repayments well before the deadline.

• Declare dividends formally if using them to clear the loan.

• Work with an accountant who tracks your DLA monthly.

At Zeus Accountants, we monitor our contractors’ DLA balances in real time — so you’re never surprised by a tax bill.

What happens if I don’t repay the director’s loan in time?

Your company pays Section 455 tax.

You could also face Benefit in Kind (BiK) charges if the loan exceeds £10,000 and no interest is paid. It’s a double hit: the company loses cash flow, and you get a personal tax charge.

Can I offset dividends or salary against my director’s loan balance?

Yes — it’s a common and legitimate way to clear an overdrawn loan.

But timing matters: dividends must be formally declared before the repayment date. You can’t backdate them once the books are closed.

Can a director’s loan be written off legally?

It can, but it comes with tax consequences.

If your company writes off the loan and you’re a shareholder, HMRC treats it as a dividend, taxable through your Self Assessment.

If you’re not a shareholder, it’s treated as employment income, subject to PAYE and NIC.

Tax and Accounting Implications

How do director’s loans affect corporation tax?

Section 455 tax is treated as a temporary additional Corporation Tax charge.

It’s not deductible — meaning it doesn’t reduce your taxable profits. But once the loan is repaid, the company can reclaim the charge from HMRC.

Is a written-off director’s loan treated as income?

Yes — for tax purposes, HMRC sees it as a distribution (dividend) if you’re a participator.

That means personal dividend tax applies at your marginal rate — typically between 8.75% and 39.35% depending on your income band.

Does writing off a director’s loan trigger income tax or NIC?

If the director is also an employee, the write-off could be treated as employment income, meaning PAYE and National Insurance might apply.

This usually happens if the director doesn’t hold shares.

Are interest-free loans to directors allowed under HMRC rules?

Yes — but only up to £10,000 without triggering a benefit-in-kind.

Anything above that, and HMRC assumes you’ve received an interest benefit. The difference between the HMRC official rate (currently 2.25%) and what you pay becomes taxable.

What are the rules on charging interest on director’s loans?

You can charge interest on money you lend to your company. Conversely, if the company lends to you, you can choose to pay interest at HMRC’s official rate to avoid a benefit charge.

The key is proper documentation — an interest agreement or loan note helps.

How do you account for interest on a director’s loan?

Interest paid to or from the company must be included in your accounts.

If you pay interest to the company, it counts as company income. If the company pays you, it’s an allowable expense — but must be declared as personal income on your tax return.

Are there any benefits in kind implications for director’s loans?

Yes — if your loan exceeds £10,000 and is interest-free (or below the official rate).

It’s reported on Form P11D and the company pays Class 1A NIC.

This is one of the most commonly overlooked compliance areas among contractors.

Record Keeping and Reporting

What records must be kept for a director’s loan account?

You’ll need a detailed breakdown of all transactions:

• Dates, amounts, and purposes of withdrawals and repayments.

• Any interest charged or repaid.

• Corresponding dividend or salary entries used to clear balances.

Good bookkeeping software — or a vigilant accountant — can make this painless.

How do I show director’s loans in the company’s annual accounts?

DLAs must be disclosed in your statutory accounts if overdrawn, with details of balances and repayments.

It’s a transparency measure — and yes, Companies House filings make that public.

Do I need to report a director’s loan on my Self Assessment?

Yes, if:

• A loan was written off, or

• You received a taxable benefit for an interest-free loan.

Your accountant should help ensure these figures are properly reflected in your personal tax return.

How do I reconcile a director’s loan account at year-end?

Cross-check all withdrawals, repayments, and declared dividends.

Your accountant will match these against your bank and payroll records to confirm the closing DLA balance — the number that goes in your final accounts.

Risks, Penalties, and HMRC Scrutiny

What are the risks of having an overdrawn director’s loan account?

The biggest risk is unexpected tax bills.

An overdrawn DLA affects your company’s working capital and can raise red flags during HMRC reviews. Persistent overdrawing can even suggest poor financial management.

Can an overdrawn director’s loan trigger an HMRC investigation?

It can. HMRC regularly checks DLAs for disguised income — where directors draw funds instead of declaring salary or dividends.

Having a clear repayment plan and tidy records goes a long way toward avoiding unwanted attention.

What penalties apply for misusing a director’s loan?

Aside from Section 455 tax, HMRC can impose late payment interest, penalties, and even director disqualification in severe cases.

It’s rare, but not unheard of, especially if a company goes insolvent with an unpaid DLA.

Can HMRC treat an overdrawn DLA as a disguised dividend or salary?

Yes — if they believe you’re avoiding income tax.

HMRC can reclassify loans as salary (triggering PAYE/NIC) or dividends (triggering dividend tax).

In short, if it looks like income, they’ll treat it like income.

How does an overdrawn DLA affect company solvency or liquidation?

If your company goes into liquidation and your DLA is overdrawn, the liquidator will demand repayment.

It’s a company asset, and you, as the director, become a debtor.

We’ve seen this become painful for contractors who didn’t realise how big their DLA had grown over the years.

Final Thoughts

Director’s loans aren’t a bad thing — they’re just misunderstood.

Used wisely, they offer flexibility and short-term funding options for contractors. Misused, they become a tax headache.

At Zeus Accountants, we help contractors like you understand, plan, and manage director’s loans the right way. We’ll make sure your DLA is clean, compliant, and never a surprise on your tax return.

Ready to get clarity on your director’s loan?

Let’s make sure your hard-earned money works for you — not against you.

Book a free consultation with Zeus Accountants today, and we’ll review your current setup, check for hidden Section 455 risks, and create a simple strategy to keep your company finances healthy.

Visit Zeus Accountants or call 01303 883433 to get started.

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