If you run a limited company and you’ve ever paid for something personal on the company card, lent the business money from your own savings, or withdrawn cash that wasn’t salary or dividends, you’ve already been using a Directors Loan Account – whether you realised it or not.
A Directors Loan Account (DLA) is one of those things that most owner-managed businesses have, but few directors properly understand until HMRC comes knocking. And in 2026, with the Section 455 tax rate rising to 35.75% on new loans, the cost of getting it wrong has gone up.
This guide covers what a DLA is, how it works in practice, the tax rules you need to know for the 2026/27 tax year, and what you can do to stay on the right side of HMRC.
What Is a Directors Loan Account?
A DLA is simply a running record of financial transactions between you (as a director) and your company that fall outside of your normal pay.
It doesn’t include your salary, declared dividends, or reimbursed business expenses. Everything else – money you put into the company, money you take out for personal use, personal costs paid on the company card – gets tracked here.
At any given point, the account sits in one of two positions. It’s either in credit, meaning the company owes you money (usually because you’ve lent it funds or paid for company costs personally), or it’s overdrawn, meaning you owe money back to the company.
An in-credit DLA is generally straightforward. You can withdraw what the company owes you without any tax consequences. It’s the overdrawn side that creates problems – and it’s where most directors run into trouble.
How a DLA Becomes Overdrawn
It rarely happens in one dramatic withdrawal. More often, an overdrawn DLA builds up gradually through a series of small, seemingly harmless transactions. You might use the company account to pay for a family holiday, cover a personal bill during a busy month, or take out cash before a dividend has been formally declared.
None of these things are illegal. But if the total amount you owe the company exceeds what you’ve put in or been paid, your DLA tips into overdrawn territory – and that’s where tax obligations start stacking up. The most common culprits include:
- Personal expenses paid through the company bank account – anything from meals out to online subscriptions
- Cash withdrawals that aren’t processed as salary or dividends
- Money taken in anticipation of a dividend that hasn’t actually been voted on yet
- The company paying personal bills directly, such as household costs or private insurance
That third point catches people out more than you’d think. If the company doesn’t have sufficient distributable profits to declare the dividend, the withdrawal stays on the books as a loan – and all the tax rules below start to apply.
The Section 455 Tax Charge – And Why It Just Got More Expensive
This is the big one. If your DLA is overdrawn at the end of your company’s accounting period and you don’t repay the balance within nine months and one day of that date, your company must pay a Section 455 tax charge to HMRC.
For loans made before 6 April 2026, the rate is 33.75%. But following the November 2025 Budget, the dividend upper rate increased by two percentage points, and because the Section 455 rate is directly tied to it, loans made on or after 6 April 2026 now attract a charge of 35.75%.
The Section 455 charge is technically refundable once you repay the loan, but there’s a catch. HMRC won’t process the refund until nine months and one day after the end of the accounting period in which you cleared the debt. So even if you repay relatively quickly, the company’s cash could be locked up for well over a year.
The Transitional Headache
If you have loans that straddle the 6 April 2026 boundary, things get more complicated. HMRC will apply the 33.75% rate to loans advanced before that date and 35.75% to those advanced on or after it. When you make partial repayments, it matters which loans those repayments are allocated against.
You and the company can choose how to allocate repayments, and you should document that choice clearly – an email or board minute will do. If you don’t specify, HMRC will typically apply the “rule in Clayton’s case,” treating repayments as clearing the oldest loans first.
That default won’t always work in your favour, particularly where newer loans carry the higher rate.
Benefit in Kind: The ÂŁ10,000 Threshold
The Section 455 charge isn’t the only tax consequence of an overdrawn DLA. If your loan exceeds ÂŁ10,000 at any point during the tax year and you’re not paying interest on it (or you’re paying less than HMRC’s official rate), it’s treated as a benefit in kind.
For the 2025/26 and 2026/27 tax years, HMRC’s official rate of interest sits at 3.75% – up from 2.25% in 2024/25. That’s a meaningful jump.
On a ÂŁ25,000 interest-free loan, the taxable benefit would be ÂŁ937.50 for the year. You’d owe income tax on that amount through your self-assessment, and the company would need to pay Class 1A National Insurance at 15% on the same figure.
This benefit must also be reported on a P11D form and disclosed in the company’s corporation tax return.
What Happens If the Loan Is Written Off?
Sometimes a company decides to write off a director’s loan rather than require repayment. This might seem like a clean solution, but it triggers its own tax consequences.
A written-off loan is generally treated as a distribution – taxed on the director at dividend rates. For the 2026/27 tax year, the rates are:
- 10.75% for basic rate taxpayers
- 35.75% for higher rate taxpayers
- 39.35% for additional rate taxpayers
The director must declare the written-off amount on their self-assessment return, and the company will also need to pay Class 1A National Insurance on the amount.
Writing off the loan does release the Section 455 charge (if one has been paid), but in most cases the combined personal tax and NIC cost makes writing off more expensive than simply repaying the balance. It’s worth running the numbers before going down this route.
The Bed and Breakfasting Trap
One tactic that directors have historically used is repaying the loan just before the nine-month deadline and then re-borrowing the same amount shortly afterwards. HMRC anticipated this and introduced anti-avoidance rules to deal with it.
Under the 30-day rule, if you repay a loan and then borrow ÂŁ5,000 or more from the company within 30 days, HMRC can treat the original loan as never having been repaid. The Section 455 charge would still apply. There’s also a broader “arrangements” rule – if HMRC believes the repayment was part of a pre-planned cycle of borrowing and repaying to avoid the charge, they can disregard the repayment altogether.
The bottom line is that repayments need to be genuine. Cycling money in and out of the company around deadline dates is exactly the kind of behaviour HMRC looks for.
Managing Your DLA in 2026/27
Getting your DLA under control doesn’t require anything complicated. It mostly comes down to keeping proper records and staying aware of the deadlines. Here are the things that make the most difference:
- Track every transaction with a date, amount, and description. Your bookkeeper or accountant should be reconciling the DLA regularly – monthly is ideal, but quarterly at a minimum.
- Know your year-end deadline. Work backwards from your company’s accounting year end. You have nine months and one day to clear any overdrawn balance before the Section 455 charge kicks in. Put a reminder in at the six-month mark so you have time to plan.
- Think carefully about how you’ll clear the balance. The main options are a direct cash repayment, declaring a dividend to offset the loan, or voting a bonus. A dividend avoids employer’s NIC but is taxed as personal income. A bonus attracts both PAYE and NIC but is deductible for corporation tax purposes. There’s no universal “best” approach – it depends on your income, the company’s profits, and your wider tax planning strategy.
- If your DLA spans the April 2026 rate change, document how any repayments are allocated. This is a small administrative step that could save you real money.
- Get your DLA reviewed before your year end, not after. By the time you’re filing the return, your options are limited. Ahead of the year end, there’s usually room to restructure things more efficiently.
How Double Point Can Help
Directors loan accounts are a normal part of running an owner-managed business, but the tax rules around them are unforgiving – especially now that the Section 455 rate has increased. The difference between a well-managed DLA and a neglected one can be thousands of pounds in avoidable tax charges.
At Double Point, our chartered accountants work with directors to monitor DLA balances throughout the year, plan repayment strategies ahead of deadlines, and make sure everything is reported correctly to HMRC.
Whether you need help clearing an overdrawn balance, understanding the benefit-in-kind rules, or restructuring how you take money from your company, we can help you find the most tax-efficient route.
Book a free consultation with us today, and let’s get your directors loan account in order before your next year-end.