Director's Loan Accounts Explained: Avoid Section 455 Tax Issues
Director’s Loan Accounts (DLAs) are one of the most common causes of Corporation Tax problems for limited company directors. This guide explains how DLAs work, when Section 455 tax applies, and how to avoid unnecessary HMRC issues.
We help directors manage Director’s Loan Accounts correctly and avoid unexpected tax consequences.
Understanding Your Director's Loan Account
Your Director’s Loan Account (DLA) records money moving between you and your company outside normal salary, dividends and reimbursed business expenses.
It may include:
- Personal withdrawals
- Money introduced into the company
- Director loans
- Unreimbursed business expenses
- Other transactions between you and your company
If not monitored properly, an overdrawn Director’s Loan Account can result in Section 455 tax charges, benefit-in-kind implications and additional HMRC scrutiny.
Common Director's Loan Account Mistakes
Many Director’s Loan Account issues arise because transactions are not recorded correctly or balances are not reviewed regularly. Some of the most common mistakes include:
Using Company Funds for Personal Spending
Allowing an overdrawn balance to remain unpaid for long periods can result in additional tax charges and unnecessary cash flow costs for the company.
Leaving Balances Outstanding
Allowing a Director’s Loan Account balance to remain unpaid for long periods may result in additional tax charges and compliance concerns.
Ignoring Year-End Reviews
Failing to review Director’s Loan Account balances before the company’s year-end can lead to unexpected tax liabilities and missed planning opportunities.
Regular bookkeeping and timely reviews can help directors identify potential issues early and keep their Director’s Loan Account under control.
Overdrawn Director's Loan Accounts and Section 455 Tax
If you owe money to your company at the end of its accounting period, your Director’s Loan Account may be overdrawn.
An overdrawn Director’s Loan Account can create additional tax and compliance considerations, including:
- Section 455 tax (currently 33.75%) payable by the company on the outstanding loan balance
- A potential Benefit-in-Kind charge if the loan exceeds certain thresholds and interest is not charged at HMRC’s official rate
- Increased HMRC scrutiny where director withdrawals are not properly recorded or managed
Although Section 455 tax is usually reclaimable once the loan is repaid, it can still create an unnecessary cash flow cost for the company.
Reviewing your Director’s Loan Account before the year end can help identify potential issues early and reduce the risk of unexpected tax charges.
Repayment Rules
Repayments must be genuine and not part of arrangements designed solely to avoid Section 455 tax. HMRC may challenge loans that are repaid and then withdrawn again shortly afterwards.
How RAIMS Manages Your DLA
Director’s Loan Accounts should always be reviewed alongside your salary/dividend strategy and year-end accounts.
We:
Monitor your DLA
Help prevent Section 455 tax charges
Advise on salary/dividend planning
Ensure compliance with HMRC rules
Reduce the risk of unnecessary tax charges
The example below shows how an overdrawn Director’s Loan Account can quickly trigger unexpected tax charges.
- Company must pay £1,012.50 to HMRC
- This is reclaimable only when the director repays the loan
- If the loan exceeds £10,000, a benefitinkind also applies
This example shows how small withdrawals can create unexpected tax charges.
Frequently Asked Questions About Director’s Loan Accounts
What is a Director’s Loan Account?
A Director’s Loan Account (DLA) records money taken from or introduced into a limited company by a director outside normal salary, dividends, or reimbursed business expenses. An overdrawn DLA can create additional tax and HMRC compliance issues if not managed correctly.
When does Section 455 tax apply?
Section 455 tax applies when a Director’s Loan Account remains overdrawn at the company’s year-end and is not repaid within 9 months and 1 day after the accounting period ends. The company may then face a temporary Section 455 tax charge payable to HMRC.
Can I clear an overdrawn Director’s Loan Account with dividends?
Yes — in some cases, dividends can be used to reduce or clear an overdrawn Director’s Loan Account. However, dividends must be legally declared and supported by sufficient company profits. Incorrect dividend planning can create further tax or compliance issues.
What happens if my Director’s Loan Account exceeds £10,000?
If an overdrawn Director’s Loan Account exceeds £10,000, HMRC may treat it as a beneficial loan. This can create a benefit-in-kind tax charge unless interest is charged at HMRC’s official rate.
Can poor bookkeeping cause Director’s Loan Account problems?
Yes — HMRC regularly reviews Director’s Loan Accounts during Corporation Tax enquiries, especially where there are large withdrawals, inconsistent dividend payments, or repeated overdrawn balances. Poorly managed DLAs can increase the risk of HMRC scrutiny and additional tax charges.
Can HMRC investigate Director’s Loan Accounts?
Yes — inaccurate bookkeeping can lead to incorrect Director’s Loan Account balances, missed repayments, and unexpected Section 455 tax charges. Regular bookkeeping reviews help ensure DLA balances are accurate and compliant.
Unsure whether your Director’s Loan Account is being recorded correctly?
RAIMS Accountants can review your company records and advise on potential tax implications.