Director's loan

A director's loan is any money you take out of (or put into) your Ltd company that isn't salary, dividend, or legitimate expense reimbursement. It's recorded in a Director's Loan Account (DLA) — positive when the company owes you, negative when you owe the company.

Small overdrawn balances aren't a problem. Loans up to £10,000 are permitted without tax consequences or shareholder approval. Above £10,000, the loan becomes a benefit in kind and HMRC deems interest at the official rate (3.75% for 2026-27) — you either pay that interest to the company or report the benefit on a P11D.

The serious cost is Section 455 Corporation Tax. If a DLA is overdrawn at the company's year end and still overdrawn nine months later (the "S455 charge date"), HMRC levies 35.75% on the outstanding balance (2026-27) — matching the higher-rate dividend tax rate. It's designed to stop directors using loans instead of dividends to avoid tax.

S455 tax is refunded nine months after the end of the accounting period in which the loan is repaid. So it's a cash-flow hit, not a permanent cost — but getting it back can take 18 months or more.

"Bed and breakfasting" — repaying a loan just before year-end and redrawing shortly after — triggers anti-avoidance rules. HMRC treats the redrawn amount as the original loan if more than £5,000 is redrawn within 30 days of repayment, so S455 still applies.

Related terms

• Corporation Tax — Tax on company profits — 19% small profits rate up to £50k, 25% main rate above £250k, with marginal relief between.
• Dividend tax — The tax charged on dividend income above the £500 dividend allowance — 10.75%, 35.75%, or 39.35% depending on your tax band (2026-27).
• Personal Service Company (PSC) — A Ltd company through which a single contractor provides their services to one or more clients.