Last reviewed: 29 September 2026 · Reviewed by IFM's qualified accountant
A director's loan can start with one bank transfer, but the final tax position depends on every debit, credit and repayment date. The company is a separate legal person, so its bank balance is not the director's personal money. Keeping the loan account current helps prevent an unexpected company tax charge, an employment benefit, an unlawful dividend or a debt that becomes urgent during insolvency.
What is a director's loan account and how does it become overdrawn?
A director's loan account is the ledger recording money a director pays into the company and money taken out that is not already salary, a valid dividend, an expense repayment or repayment of money the company owes the director. GOV.UK says the company must keep a record of money borrowed from or paid into it.
The account is in credit when the company owes the director. Common credits include cash introduced to fund the business, company costs paid personally and remuneration or dividends left undrawn. Repaying a genuine credit balance is normally repayment of a debt, not fresh salary or dividend.
The account becomes overdrawn when the director owes the company. That may happen through a cash withdrawal, a personal bill paid from the company bank account, private use of a company card, an advance before payroll, or drawings that exceed salary and lawfully declared dividends. An unlawful dividend may also be reclassified as a loan that must be repaid.
Keep a separate account for each director. Record the actual transaction date and evidence; reconcile it to bank, payroll, expenses and dividend paperwork monthly. Track both the year-end and highest tax-year balances because different tax tests use different dates.
What does company law say about loans to directors?
Section 197 of the Companies Act 2006 generally requires a company loan to a director, or a guarantee or security connected with one, to be approved by a resolution of the members. Before the resolution, members must receive a memorandum describing the transaction, the amount and purpose of the loan, and the extent of the company's connected liability.
Section 207 provides a minor-transaction exception where the loan or quasi-loan and other relevant transactions or arrangements do not exceed £10,000 in aggregate. Other statutory exceptions can apply, including limited cases involving company business, legal proceedings, regulatory action, intra-group arrangements and money-lending companies. Do not assume an exception applies merely because the director controls the company.
Company-law approval and tax are separate. Shareholder approval does not prevent a section 455 charge or a benefit in kind, and paying tax does not make an unauthorised loan lawful. Record the board's decision, conflicts, terms, interest, repayment schedule and any member resolution before advancing material funds.
Section 413 also requires details of advances, credit and guarantees involving directors in the notes to the accounts. For an advance or credit, the notes include the amount, interest rate, main conditions and amounts repaid, plus relevant totals. The balance sheet also shows whether the director owes the company or the company owes the director.
What tax does the company pay if the loan is not repaid in time?
Section 455 of the Corporation Tax Act 2010 can charge a close company when it makes a loan or advance to a participator or an associate. A participator is commonly a shareholder, and many owner-managed companies are close companies. A director who is not a shareholder can fall outside section 455 while still being affected by company-law and employment-benefit rules.
The key test is whether the relevant balance remains outstanding nine months and one day after the end of the company's Corporation Tax accounting period. The company reports the loan on form CT600A with its Company Tax Return. The section 455 tax is due on the same date as the company's normal Corporation Tax for that period.
For loans made or benefits conferred from 6 April 2026, HMRC states that the section 455 rate is 35.75%. Loans made from 6 April 2022 to 5 April 2026 used 33.75%, so a mixed balance may require separate tracing. The charge belongs to the company and does not repay or extinguish the director's debt.
When the loan is permanently repaid, released or written off, the company can normally claim section 455 relief, but it cannot reclaim interest charged for late payment. Relief becomes due nine months and one day after the end of the accounting period in which repayment, release or write-off occurs. The usual claim limit is four years from the end of that accounting period.
Read our guide to Corporation Tax payment and filing deadlines and use the Deadline Finder to identify the company's accounting dates. A Corporation Tax return deadline and the tax payment date are not the same.
How does a worked director's loan example look?
Assume an owner-director borrows £20,000 on 1 May 2026. The company has a 31 March 2027 accounting-period end, the full balance remains outstanding, and no exclusion applies. Nine months and one day after 31 March 2027 is 1 January 2028.
The section 455 calculation is £20,000 × 35.75% = £7,150. The company pays £7,150 by 1 January 2028 and still records the £20,000 as money owed by the director. The payment is a temporary company tax charge, not a substitute for repayment.
If the director permanently repays £20,000 on 30 June 2028, the company may claim section 455 relief. The relief does not become payable until nine months and one day after the end of the accounting period containing that repayment. The precise date therefore depends on the company's accounting period, and any bed-and-breakfasting rule must be checked before claiming.
If the loan were interest-free throughout a full tax year while HMRC's official rate was 3.75%, the starting point for the beneficial-loan cash equivalent would be £20,000 × 3.75% = £750, reduced by qualifying interest actually paid. The statutory calculation and rate for the exact period must be checked, especially because HMRC can review the official rate during a tax year.
Is there a benefit in kind on a director's loan?
An interest-free or low-interest loan provided by reason of employment can create a taxable benefit for the director and a National Insurance liability for the company. This charge is separate from section 455: one is an employment benefit, while the other is a company charge on certain loans to participators.
The small-loan exemption generally applies only if the combined outstanding balance of all qualifying employment-related loans is less than £10,000 throughout the whole tax year. If the balance reaches or exceeds the threshold, calculate the benefit under the normal averaging method or, where applicable, the precise method. It is not simply a tax on the amount above £10,000.
HMRC's actual official interest rate is 3.75% from 6 April 2026. Deduct qualifying interest actually paid by the director when calculating the cash equivalent. The company normally reports the benefit through payroll or on form P11D as appropriate and accounts for the relevant employer National Insurance.
Do not rely on a year-end journal saying interest was charged. Confirm the loan agreement, calculation, due date and evidence of payment. Check HMRC's published rate for every period because the official rate may change.
Can I repay a director's loan and borrow it back?
A genuine permanent repayment can reduce the balance, but anti-avoidance rules prevent short-term recycling designed mainly to secure section 455 relief. The rules are often called “bed and breakfasting”.
The 30-day rule can apply when repayments total £5,000 or more and new loans of £5,000 or more are made within the relevant 30-day window. The repayment is matched with the new borrowing to the extent required, leaving the older loan exposed to section 455.
A separate arrangements rule can apply where £15,000 or more is outstanding before a repayment and, when the repayment is made, arrangements exist for new borrowing. It can apply even when the new loan falls outside 30 days. There is an exception where the repayment comes from income or assets subject to Income Tax, but this is technical and should be checked before relying on it.
Do not move personal funds in for a few days and plan to take them straight back. Review the full account, connected persons and later transactions before treating a repayment as permanent.
What happens to an overdrawn loan account if the company becomes insolvent?
An overdrawn director's loan account is an asset belonging to the company. Insolvency does not erase it. A liquidator or official receiver can pursue the director for repayment so the money is available to creditors, and normal debt-recovery action may follow. If the director cannot repay, personal insolvency can become a risk.
The office-holder will examine withdrawals, repayments, dividends, approvals and the point at which the directors knew or should have known that the company was insolvent. Unlawful dividends may also be recoverable. Repaying a director or shareholder ahead of other creditors can create additional issues once creditor interests take priority.
Do not try to clear a loan with a dividend when there are insufficient distributable profits. Preserve records and take insolvency advice early. Section 455 already paid does not settle the underlying debt, although relief may arise later if the loan is repaid, released or written off under the applicable rules.
How can a director's loan be cleared?
The cleanest route is often repayment from the director's personal funds. This reduces the debt without creating salary or dividend, although the source of funds and any rapid reborrowing must be genuine and documented.
A salary or bonus can be credited to the loan account, but it must be processed through payroll with PAYE and employee and employer National Insurance as applicable. The amount credited is the net pay after deductions, not automatically the gross award. The company should approve the remuneration and record when the director became entitled to it.
A dividend can be credited only if the director is a shareholder, sufficient distributable profits exist and the dividend is properly declared. It follows the rights attached to the shares and creates personal dividend income. Review salary versus dividends before choosing this route; a retrospective label cannot turn unsupported drawings into a lawful dividend.
A formal release or write-off ends the debt but is rarely tax-free. GOV.UK states that the company must deduct Class 1 National Insurance through payroll and the director pays Income Tax through Self Assessment. The company may then claim section 455 relief subject to the timing rules. Legal, accounting and solvency consequences should be reviewed before approving a write-off.
The right route depends on cash, distributable reserves, payroll costs, the director's personal tax position and the company's solvency. Combining routes may be sensible, but each part must retain its proper legal and tax treatment.
What should be on a director's loan checklist?
IFM's limited company accounts and tax service can help reconcile the account and connect the company-law, accounts and tax treatments. Also read expenses a limited company can claim so personal spending is not confused with a business cost.
What do people also ask about directors loans?
Do I have to repay a director's loan?
Yes, an overdrawn account is money owed to the company unless it is validly cleared, released or written off. Paying section 455 tax does not cancel the debt. If the company becomes insolvent, a liquidator can pursue repayment for creditors. Any alternative such as salary, dividend or write-off has its own approval, reporting and tax consequences.
Can a director's loan be interest-free?
It can be interest-free, but that does not make it tax-free. If combined qualifying employment-related loans are not below £10,000 throughout the tax year, the interest saving can be a benefit in kind. The company must also consider section 455 if the director is a participator and the loan remains outstanding after the deadline.
How long can a director's loan stay outstanding?
There is no single rule that automatically cancels a loan after a set period. However, section 455 can arise when a relevant close-company loan remains outstanding nine months and one day after the accounting period, while employment-benefit and accounts-disclosure rules can apply earlier. The agreement, company-law approval and solvency position also need review.
Does a director's loan affect my mortgage application?
It can. A lender may consider the debt, its repayment terms, company accounts and the sustainability of the director's income. The accounting and tax treatment does not bind a mortgage lender's affordability assessment. Keep the balance reconciled and disclose information accurately when requested; ask the lender or broker what evidence is required.
Can I use a dividend to clear a director's loan?
A valid dividend can be credited to the account if the director is a shareholder, the company has enough distributable profits, the correct corporate process is followed and the dividend matches the share rights. The director then has dividend income. A dividend cannot be backdated or created merely to disguise withdrawals when profits were unavailable.
What happens when a director's loan is written off?
The debt ends, but tax and National Insurance can arise. GOV.UK says the company deducts Class 1 National Insurance through payroll and the director reports Income Tax through Self Assessment. The company may claim section 455 relief after the statutory delay. A write-off should be formally approved and reviewed for company-law and solvency consequences.
Which official sources support this directors loan guide?
- GOV.UK: Director's loans
- GOV.UK: If you owe your company money
- HMRC Company Taxation Manual: section 455 rate
- HMRC Company Taxation Manual: 30-day rule
- GOV.UK: HMRC official beneficial-loan rates
- Companies Act 2006: sections 197 and 207
- Companies Act 2006: section 413 accounts disclosure
- Insolvency Service: director's loan accounts
General guidance, not advice for your situation.
