Director's Loan Account Guide (2026/27)

1. Overview: what a DLA actually is

A Director's Loan Account is simply the running balance of money owed in either direction between a UK limited company and a person who is both a director and (usually) a shareholder. It is not a separate bank account: it is a nominal-ledger account inside the company's accounting system that records any cash or value moving between the company and the director outside the three formal channels of salary, reimbursed expenses and declared dividends. If the director draws £2,000 from the company bank account on a Tuesday for personal use, the bookkeeping posts it to the DLA. If the director pays a £500 supplier invoice on the company's behalf using their personal card, that also posts to the DLA but in the opposite direction.

The DLA matters for tax because UK corporation tax treats a close company and its directors as related parties whose transactions cannot be priced or timed for tax advantage. Without the DLA framework, a director could effectively extract company profits as a long-running interest-free loan, deferring dividend tax indefinitely. The rules in sections 455 to 464 of the Corporation Tax Act 2010 prevent that by imposing a refundable tax charge on outstanding balances. A parallel set of rules in the Income Tax (Earnings and Pensions) Act 2003 imposes a benefit in kind where the loan is interest-free or below HMRC's official rate. Together these mechanisms keep the loan route from becoming a back door around the dividend tax calculator rates or the headline Corporation Tax bill.

For a small-company director, the DLA is unavoidable bookkeeping. The relevant question is not whether you have a DLA - you do, the moment you draw anything outside salary and dividend - but whether the year-end balance is in credit, overdrawn within the safe £10,000 corridor, or overdrawn beyond it. The rest of this guide walks through each scenario and the tax cost.

2. DLA structure: credit, overdrawn, year-end

The DLA records every transaction between director and company that is not salary (which goes through PAYE), reimbursed business expense (which goes through the expenses ledger) or formally declared dividend (which goes through the dividends journal and the company secretarial records). Anything else - personal drawings, repayments, director paying a company invoice from a personal card, company paying a director's personal credit card by mistake - all flows through the DLA.

Credit DLA (company owes director). The account is in credit when the director has put more value into the company than they have taken out. The most common cause is the director paying for company expenses or supplier invoices from personal funds - travel, software subscriptions, hardware, professional fees. A credit DLA is effectively a loan from the director to the company. It can be repaid at any time without triggering any UK personal tax charge, because the director is recovering money they already paid out of post-tax personal income. Credit DLA withdrawals are not dividends and are not subject to PAYE. For directors who routinely fund company spend, keeping the DLA in credit is a small but real cashflow benefit - the company owes you, not the other way round.

Overdrawn DLA (director owes company). The account is overdrawn when the director has drawn more from the company than salary, expenses and declared dividends cover. This is the situation that triggers all the machinery in sections 3 through 6 of this guide. An overdrawn DLA is, in legal terms, a loan from the company to the director. The loan is a real debt - if the company is wound up, the liquidator will pursue the director for repayment - and the tax treatment cascades from that legal reality. There is no statutory de minimis for the loan itself: a £50 overdrawn balance is technically a loan, even though £50 is below the threshold for any of the practical tax charges.

Year-end balance is the key reference point. The accounting period of a UK company normally ends on the anniversary of its incorporation. The balance on the DLA at the close of business on that date drives the section 455 analysis. The benefit in kind analysis is different - it looks at the highest balance at any point during the tax year, not the year-end snapshot. So a director who briefly goes £15,000 overdrawn mid-year and clears the balance by year-end avoids section 455 but still owes BIK and Class 1A.

Reconciliation in practice. Bookkeeping software (Xero, FreeAgent, QuickBooks) tracks the DLA automatically. Most small-company accountants reconcile the DLA monthly and flag any drift towards the £10,000 BIK threshold or any accumulating overdrawn balance heading into the nine-month section 455 deadline. The single biggest source of accidental overdrawn DLAs is the director "paying themselves a dividend" verbally without the board-resolution paperwork - HMRC can reclassify that as drawings on the DLA on enquiry, which retrospectively creates a section 455 charge if the balance was still outstanding nine months after the end of the accounting period in which it was drawn.

3. Section 455 charge on overdrawn DLAs

Section 455 of the Corporation Tax Act 2010 imposes a Corporation Tax charge on a close company when it makes a loan to a participator (director, shareholder or close relative of either) and the loan is not repaid within nine months and one day of the accounting period end. The rate is not a fixed figure: section 455(2) sets it at the dividend upper rate for the tax year in which the loan is made. That is 35.75% for loans made on or after 6 April 2026, 33.75% for loans made from 6 April 2022 to 5 April 2026, and 32.5% for loans made from 6 April 2016 to 5 April 2022 (CTA 2010 s.455, ITA 2007 s.8(2)). A loan made in March 2026 and still outstanding at the deadline is charged at 33.75%, not 35.75%.

The nine-month rule. Section 455 is assessed on the position nine months and one day after the accounting period end. For a 31 March year-end the deadline is 1 January the following calendar year. A loan that existed mid-year but was cleared before the nine-month window closes does not trigger section 455 - the charge attaches only to balances still outstanding at that deadline. This is the practical reason most director loans are taken in the first half of the accounting period and cleared by net dividend or salary payments before year-end: the director gets short-term liquidity without triggering the corporation tax charge.

Worked example. Director draws £30,000 from the company on 1 May, posted to the DLA. The company's year-end is 31 March. By the following 1 January (the nine months and one day deadline) the director has not repaid any of it. Section 455 charge:

• Outstanding balance at deadline: £30,000
• Section 455 rate (loan made on or after 6 April 2026): 35.75%
• Section 455 charge: £10,725.00

The £10,725.00 is paid by the company through its Corporation Tax return: it is worked out on the CT600A supplementary page and carried from box A80 to box 480 of the CT600, "Tax payable on loans and arrangements to participators" (HMRC Company Tax Return guide). It is in addition to the company's normal Corporation Tax bill on its profits. The personal director does not get a separate PAYE charge from section 455 itself - section 455 is a corporate-level charge - but the loan is still a debt of the director and must be repaid to the company at some point.

Refund mechanism: the L2P claim. Section 455 is technically a deposit, not a permanent tax. Once the underlying loan is repaid, released or written off (with important caveats on write-offs - see section 5), the company can claim relief for the section 455 tax, online through HMRC's L2P service. Under CTA 2010 s.458 the claim must be made within four years from the end of the financial year in which the repayment, release or write-off happens, and where the repayment comes after the section 455 tax was due, relief cannot be given until nine months after the end of the accounting period in which the repayment was made. HMRC's guidance puts that as nine months and one day, and says it will not repay before then. The refund is not automatic: the company has to claim it. Until then the money sits with HMRC, so section 455 works as a deposit rather than a permanent tax.

Continuing the worked example. Two years after the original loan, the director clears the £30,000 DLA balance from net dividend drawings. The company files form L2P naming the original accounting period and the repayment date and amount. The repayment is genuine (not caught by the bed-and-breakfasting rules in section 6 of this guide), so HMRC refunds £10,725.00 to the company, no earlier than nine months and one day after the end of the accounting period in which the repayment was made. The net economic cost of the loan is therefore the time value of having that £10,725.00 parked with HMRC for the intervening years, plus any benefit in kind charges along the way.

Authoritative HMRC guidance is the HMRC Company Taxation Manual at CTM61500 (the section 455 chapter), and HMRC's L2P guidance sets out the relief claim step by step.

4. Benefit in kind on interest-free loans

Section 455 is the corporate-level charge. Running in parallel, a separate set of rules in chapter 7 of part 3 of ITEPA 2003 (sections 173 to 191) imposes a benefit in kind on the director personally where the loan is interest-free or below HMRC's official rate of interest. The benefit is treated as employment income, taxable at the director's marginal Income Tax rate, and the company pays employer Class 1A NI on the same cash equivalent.

The £10,000 threshold. The benefit in kind rules apply only if the loan exceeds £10,000 at any point in the tax year. Crucially, the test is the maximum balance at any moment during the year - not the year-end balance, not the average (ITEPA 2003 s.180). Crossing the threshold brings the loan into the rules, but the benefit covers only the time the loan was outstanding. Under the normal averaging method (s.182) the average balance is multiplied by the official rate and by the number of whole tax months (each starting on the 6th) the loan was outstanding, divided by 12. The alternative method counts each day and applies if the employee elects for it or an HMRC officer requires it (s.183). A £12,000 loan drawn in October and repaid three days later is therefore within the rules, but the cash equivalent is small.

The official rate of interest. HMRC's official rate of interest for beneficial loans is 3.75% from 6 April 2026, the same as for 2025-26 (it was 2.25% in 2023-24 and 2024-25). The rate is published in HMRC's rates and allowances for beneficial loan arrangements. Compared to commercial mortgage and personal-loan rates, the official rate is deliberately low - reflecting the Treasury view that a beneficial-loan benefit should track a notional cost of funds rather than a high-street pricing structure. The benefit in kind cash equivalent is the loan balance multiplied by the official rate, minus any interest the director actually paid on the loan during the year.

Worked example. Director has a £25,000 interest-free loan from the company, outstanding for the full 2026/27 tax year. No interest paid by the director.

• Loan balance: £25,000
• HMRC official rate: 3.75%
• Cash equivalent of benefit: £937.50 per year
• Income Tax payable by director (40% higher-rate band): £375.00
• Class 1A NI payable by company (15%): £140.63

The cash equivalent is reported on form P11D by the employer (the company). The director's PAYE tax code is adjusted in the following year to claw back the Income Tax on the benefit, or the director declares the benefit on their Self Assessment return. The Class 1A NI is paid by the company through its annual P11D(b) declaration, due by 6 July following the end of the tax year. For a higher-rate director, the combined cost on a £25,000 interest-free loan is therefore about £515.63 per year - modest compared to dividend tax on the same sum, which is why short loans within the corporate boundary remain a common cashflow tool.

Avoiding the BIK entirely. Two clean routes. First, keep the loan below £10,000 at every point in the tax year - the de minimis exempts the benefit entirely. Second, charge interest on the loan at or above the official rate, with the interest actually paid by the director to the company (not just accrued on paper). The interest paid then becomes taxable income of the company, but at Corporation Tax rates that are usually well below the combined personal IT + corporate Class 1A cost. The latter route is mechanically clean but rarely worth the paperwork on small balances.

Full HMRC guidance at gov.uk expenses and benefits loans provided to employees. Use our P11D / BIK calculator to model the after-tax cost of any benefit in kind including a beneficial director loan.

5. Loan write-off rules

A director loan that is never repaid can be written off in the company books. The accounting entry credits the DLA back to zero and debits the company's profit and loss. The tax treatment, however, is one of the messier areas of UK tax because two parallel sets of rules can both apply depending on the facts.

The default: dividend treatment. Under section 415 of ITTOIA 2005, the written-off loan is treated as income of the director, and it counts as dividend income (ITA 2007 s.19). The amount charged is the amount released or written off, with no grossing up (ITTOIA 2005 s.416), at the dividend rates for 2026/27: 10.75% within the basic-rate band, 35.75% within the higher-rate band, and 39.35% within the additional-rate band. The director declares this on the Self Assessment return. The dividend allowance (£500 in 2026/27) applies if not already used by other dividend income.

The section 455 refund stacks on top. Once the loan is written off, the underlying section 455 charge paid by the company two or three years earlier becomes refundable via form L2P, on the same basis as a normal repayment. So a write-off is, from the company's perspective, broadly tax-neutral - it gets the section 455 back. The director, however, pays dividend-equivalent tax on the full written-off amount. Net result: the loan ends up taxed roughly at the dividend rate, which is what section 455 was designed to ensure all along.

The employment-side risk: Class 1 NIC. Where the director is also an employee of the company (which is almost universal in owner-managed PSCs), the Income Tax charge on the write-off still arises under section 415 ITTOIA 2005: HMRC's guidance is that section 415 takes priority over the employment-income loan write-off charge in section 188 ITEPA 2003, and the same amount is not charged under both (HMRC CTM61655, EIM21746). The amount written off can, however, also attract Class 1 NIC if it is remuneration or profit derived from the employment (section 3(1) SSCBA 1992), a position HMRC says was confirmed by the First-tier Tribunal in Stewart Fraser Ltd v HMRC [2011] UKFTT 46 (TC) (HMRC CTM61660). HMRC officers who find a written-off section 455 loan are instructed to refer it for review.

The Class 1 NIC is in addition to the section 415 Income Tax, not instead of it: a director-employee whose write-off is treated as remuneration can face dividend-rate Income Tax on the full amount plus employee and employer Class 1 NIC.

Practical guidance. Document the commercial reason for any write-off contemporaneously: board minutes, evidence of inability to repay, comparable treatment of any other participators in similar circumstances. If the write-off is large (over £25,000) and the company is otherwise solvent, get an external tax opinion before processing - whether the write-off is remuneration for NIC purposes is fact-sensitive and an HMRC enquiry is reasonably likely.

6. Bed-and-breakfasting anti-avoidance

Before March 2013, a director could clear an overdrawn DLA a day before the nine-month section 455 deadline, then take a new loan the day after, and reset the section 455 clock indefinitely. The accounting period that ended last year was clear; the new accounting period had not begun for section 455 purposes; the loan effectively rolled over with no tax cost. HMRC characterised the pattern as "bed-and-breakfasting" by analogy to the pre-1998 capital gains practice of selling shares overnight to crystallise gains.

The 30-day rule. From 20 March 2013 Finance Act 2013 added anti-avoidance rules to the Corporation Tax Act 2010 (sections 464C and 464D). Finance Act 2025 s.81 replaced them with effect from 30 October 2024, and the rules now sit in section 464ZA with the same two tests (FA 2025 s.81). The first, in section 464ZA(1), applies where, within any period of 30 days:

• the director repays £5,000 or more of loans that were chargeable under section 455; AND
• the company makes new chargeable loans of £5,000 or more to the director or an associate, not repaid within those 30 days; AND
• the new loans are made in a later accounting period than the loans that were repaid.

When triggered, the repayment is treated as repaying the new loans instead of the old ones, up to the smaller of the two amounts. The old loan therefore still counts as outstanding, section 455 remains due on it and relief under section 458 is not available for it.

The "arrangements" rule. Section 464ZA(3) has no 30-day limit, so a 31-day gap does not escape it. It applies where:

• immediately before the repayment the director owed the company £15,000 or more on chargeable loans; AND
• when the repayment was made, arrangements had already been made for new loans to replace some or all of the amount repaid; AND
• the new loans made to the director or an associate under those arrangements total £5,000 or more.

Again the repayment is matched to the new loans rather than the old. The carve-out: neither rule applies to a repayment that itself gives rise to an Income Tax charge on the director, such as a repayment made by declaring a dividend or a bonus (section 464ZA(6)).

What still works. A genuine repayment from personal post-tax funds (net salary, net dividend from a separate company, savings) followed by no further loan is always effective. A repayment by declaring a dividend (the most common method - declare a dividend equal to the DLA balance and offset rather than physically moving cash) is outside section 464ZA because the dividend is taxed as the director's income. What does not work is repaying from untaxed funds and then taking another loan in the next accounting period; the substance is unchanged and section 464ZA catches it.

7. Loan vs salary vs dividend

The three routes for getting cash out of a personal service company are not interchangeable. Each carries a distinct tax cost. The director loan route is sometimes presented as a fourth option but is really only a timing variant - the cash has to come out via one of the three permanent routes eventually.

Comparing the ways to take £20,000 of pre-tax profit out of a PSC with about £100,000 of profit. All figures use 2026/27 rates and assume the director's income is already in the higher-rate band (but under the £100,000 Personal Allowance taper), the dividend allowance is already used, and the company already pays the director a salary above the Upper Earnings Limit, so no NI threshold is left. With profits of about £100,000 the company is in the marginal relief band, so each extra pound of profit bears Corporation Tax at the marginal rate of 26.5% (HMRC CTM03925).

Route 1: Salary. The £20,000 has to cover the salary and the employer NI on it (15%), so it pays a gross salary of £17,391 plus £2,609 of employer NI. Both are deductible, so no Corporation Tax is paid on the £20,000. The director pays Income Tax at 40% (£6,957) and employee NI at 2% (£348). Net to director: £10,087.

Route 2: Dividend. The company first pays Corporation Tax of £5,300 at the 26.5% marginal rate, leaving a dividend of £14,700. Dividend tax at 35.75% is £5,255. Net to director: £9,445, with no NI on either side.

Which wins. On these assumptions the salary route leaves the director £642 better off, because the 26.5% marginal Corporation Tax the dividend bears outweighs the NI the salary bears. The answer turns on the company's Corporation Tax rate: in a company with profits under £50,000, taxed at 19%, the same dividend route would leave £10,409, more than the salary route. Run your own figures rather than relying on a rule of thumb.

Route 3: Director loan £20,000. No immediate personal tax. If repaid within the nine-month window, no corporate tax. If the loan is at zero interest and exceeds £10,000 at any point in the tax year: benefit in kind of £20,000 × 3.75% = £750.00 for a full year of borrowing, with 40% Income Tax (£300.00) and 15% Class 1A (£112.50). If unrepaid at the nine-month deadline, a loan made on or after 6 April 2026 attracts section 455 of 35.75% × £20,000 = £7,150, refundable eventually but parked with HMRC until repayment. The loan itself remains a debt of the director and has to be cleared by either repaying from net dividend / salary (in which case one of the first two routes is paying the tax) or being written off (in which case the treatment in section 5 applies).

When the loan route makes sense. Short-term cashflow: the director needs £8,000 in February for a personal commitment and will repay from a March dividend. No section 455 (cleared before nine-month deadline). No BIK (below £10,000). Genuinely free money in tax terms because the dividend that ultimately funds the repayment was always coming anyway.

When the loan route gets expensive. Persistent overdrawn balance left running year after year. Annual BIK + Class 1A. Section 455 cash trapped with HMRC. No personal tax advantage versus simply declaring the dividend and paying the dividend tax once. The loan route is a deferral mechanism, not a saving mechanism - and the deferral has a real cost in BIK and section 455 cashflow. Run your own numbers with the contractor calculator to see the dividend-vs-salary mix that suits your gross profit and personal income shape.

8. Practical compliance

Day-to-day DLA management is straightforward bookkeeping with a handful of statutory touchpoints across the year.

Monthly reconciliation. Modern cloud accounting software (Xero, FreeAgent, QuickBooks Online) tracks the DLA as a standard ledger account. Most small-company accountants reconcile the DLA at the same time as the bank reconciliation each month and flag any drift towards the £10,000 BIK threshold or any accumulating overdrawn balance. Catching an overdrawn position six months before year-end usually allows enough time to declare a dividend or run additional salary to clear it before the nine-month deadline closes.

CT600A and CT600 box 480. Loans to participators are reported on the CT600A supplementary page, "Loans to participators by close companies", and the tax from its box A80 goes into box 480 of the CT600. The company reports the loans made and repaid in the period, the balance outstanding nine months after the period end, and the section 455 charge due. Most accounting software prepares this section automatically from the DLA ledger. Filing the CT600 is mandatory within 12 months of period end, with the tax (including section 455) due nine months and one day after period end. See gov.uk CT600 guidance for the current form structure.

L2P claim post-repayment. Once an overdrawn DLA is cleared (by genuine repayment, not bed-and-breakfasting), the company can claim the section 455 relief online through HMRC's L2P service, giving the accounting period and date the loan was made, and the accounting period, date and amount of the repayment. The repayment must not be one that section 464ZA matches to a new loan (section 6). The claim must be made within four years from the end of the financial year in which the repayment was made (CTA 2010 s.458(3)).

P11D reporting. Beneficial loans above £10,000 at any point in the tax year must be reported on form P11D for the director, due by 6 July following the end of the tax year. The cash equivalent is calculated by either the normal averaging method (opening + closing balance / 2 × official rate × whole tax months outstanding / 12) or the daily alternative method, which applies if the employee elects for it or HMRC requires it (ITEPA 2003 s.183). Class 1A NI on the same cash equivalent is paid by the company by 22 July through the P11D(b) return.

HMRC enquiry triggers. A pattern of large overdrawn DLAs with repeat repayment-and-reborrowing in consecutive years is a known enquiry flag, particularly where the repayment looks suspiciously close to year-end and the new loan appears shortly afterwards. HMRC's CONNECT system cross-references CT600 disclosures, P11D filings and bank-derived data to identify cases worth a closer look. Documentation of genuine commercial reasons for any pattern, contemporaneous board minutes and clean separation between dividend declarations and DLA movements are the best protection against enquiry escalation. The Self Assessment step-by-step guide covers the personal-tax side of declaring beneficial-loan benefits and loan write-offs.

9. DLAs in dissolved companies

If a close company is struck off the register at Companies House with an unrepaid director loan still outstanding, the loan does not disappear. HMRC retains the right to pursue the director personally, and the routes available are not symmetrical with the going-concern position.

Where the company was solvent at the date of dissolution and the loan represented an extraction of value to the director-shareholder, HMRC will typically reclassify the outstanding balance as either an illegal dividend (under Companies Act 2006 rules on distributions from non-distributable reserves) or as undeclared employment income subject to PAYE Income Tax and Class 1 NI. Illegal dividends are recoverable from the recipient by the Crown as successor to the dissolved company's claims; PAYE reclassification triggers a personal tax bill at the director's marginal rate plus employer NI assessed on the director where the employer no longer exists. Either way, the section 455 paid by the company before dissolution is lost - the L2P refund route requires a corporate claimant, and a struck-off company cannot file claims.

The practical lesson: where a company is heading for strike-off (voluntary dissolution under section 1003 or compulsory dissolution by the Registrar), clear any overdrawn DLA before the strike-off application is filed. The cheapest route is usually a final dividend declared from any remaining reserves, offsetting the DLA. If reserves are insufficient, a members' voluntary liquidation is preferable to dissolution-with-overdrawn-DLA because the liquidator can formally write off the debt under section 415 ITTOIA, locking in dividend treatment rather than risking HMRC reclassifying it as employment income post-strike-off.

10. Related calculators and guides

• Dividend tax calculator - the route most often used to clear an overdrawn DLA.
• Corporation Tax calculator - model the CT bill before considering section 455.
• Contractor calculator - salary versus dividend mix for a PSC director.
• Self Assessment step by step - declaring beneficial-loan benefits on the director's personal return.
• How UK tax works - the broader UK tax primer.
• UK tax relief guide - reliefs that interact with PSC director income.
• P11D / BIK calculator - cash equivalent of an interest-free loan and other benefits.
• SalaryTax methodology - how every figure on this guide is sourced and verified.