A director's loan account, often shortened to DLA, is one of the most common sources of accidental corporation tax cost in an owner-managed company. Money moves between the director and the company in both directions during the year: salary, dividends, expense reimbursements, personal items paid on the company card, and round-sum withdrawals. The DLA is the running balance of those movements. When the DLA shows the director owes the company money at the year-end, a separate corporation tax charge known as section 455 can apply, and a separate benefit-in-kind can fall on the director personally. Both are avoidable with care, and both are routinely missed by owners who treat the DLA as an informal current account rather than a formal loan.
This spoke is part of the corporation tax and year-end accounts hub. It pairs with the micro-entity FRS 105 simplified reporting spoke, because the DLA still has to be disclosed even under the lightest reporting framework, and with the loss carry-forward and carry-back spoke, because a section 455 charge can sit on top of a year that is otherwise loss-making and so feels especially harsh. Read this one for the mechanics, the deadlines and the planning levers.
What the director's loan account actually is
The DLA is a ledger account in the company's books, not a separate bank account or a piece of paperwork the director signs. It records every movement of value between the director and the company that is not a routine salary or dividend properly processed through payroll or shareholder records. When the director draws money the company does not formally owe at the time, the DLA goes overdrawn. When the director introduces personal funds or is owed unpaid salary or expenses, the DLA moves into credit. The closing DLA at year-end is the figure that the section 455 rules look at.
Owners often think of the DLA as cash they have already earned, but in legal terms an overdrawn DLA is a loan from the company to the director, and the company is required to treat it as such. That status drives the tax consequences below.
When section 455 applies
Section 455 of the Corporation Tax Act 2010 imposes a charge on the company where a close company makes a loan to a participator and that loan is still outstanding nine months and one day after the end of the accounting period. Most owner-managed companies are close companies because they are controlled by five or fewer participators. The director is also a participator. So an overdrawn DLA at year-end that is not cleared within nine months of that year-end falls squarely inside the rule. The charge is paid by the company alongside its main corporation tax, on the same nine months and one day deadline.
The rate of the section 455 charge for the 2026-27 financial year is 33.75% of the outstanding balance at the end of the nine-month window. The rate was originally set to match the dividend upper rate, and although the dividend upper rate rose to 35.75% from 6 April 2026, the section 455 charge has stayed at 33.75% for 2026-27. The principle is unchanged: an owner who takes money from the company as an overdrawn loan rather than as a properly declared dividend cannot use the loan route to access a meaningfully lower headline rate.
The nine-month repayment window
The most useful planning point is that section 455 only bites if the loan is still outstanding nine months and one day after the year-end. A loan that is repaid before that date falls outside the charge entirely. For a 31 March year-end the cut-off is 1 January the following year, the same date as the main corporation tax payment. For a 31 December year-end the cut-off is 1 October. Aligning the repayment with the diary date used for the main corporation tax payment is the single most effective way to avoid the charge.
The £10,000 threshold and the beneficial-loan benefit-in-kind
A separate rule applies regardless of section 455. Where the director's loan exceeds £10,000 at any point in the tax year, the benefit of an interest-free or low-interest loan from the employer is a taxable benefit-in-kind. The taxable amount is calculated at HMRC's official rate of interest on the loan balance for the part of the year it is over £10,000. It is reported on form P11D and the company pays Class 1A National Insurance on the same figure.
A director can sidestep the benefit-in-kind by keeping the running balance at or below £10,000, or by paying the company interest at or above the official rate. The official rate is published by HMRC and updated from time to time. Treating an overdrawn DLA as a real loan, with documented interest paid by the director to the company, removes the BiK but does not by itself remove the section 455 charge if the loan is still outstanding at the nine-month point.
Reclaiming section 455 once the loan is repaid
A section 455 charge is repayable to the company once the underlying loan is repaid, written off or released. The reclaim is made through the CT600A supplementary pages, not the main corporation tax return on its own. The reclaim cannot be made until nine months and one day after the end of the accounting period in which the repayment falls, which in practice means the company waits until the year following repayment before HMRC processes the refund. Section 455 is therefore not a permanent tax cost in most cases, but it is a real cash flow cost that can sit on the balance sheet for a full extra accounting cycle.
What if the loan is written off rather than repaid?
A formal write-off of an overdrawn DLA is treated as a distribution in the director's hands, taxed as a dividend at dividend rates, with the section 455 paid by the company reclaimable in the usual way. A write-off of a loan to an employee who is not a participator is taxed as employment income instead. Whichever route applies, the write-off is a taxable event for the director personally, which is why most owners prefer to repay rather than write off.
The bed-and-breakfasting anti-avoidance rule
Before 2013, a popular trick was for the director to repay the loan a day or two before the section 455 cut-off and then redraw a fresh loan straight afterwards, claiming the loan had been repaid. HMRC introduced specific anti-avoidance rules to stop this. Where the director repays £5,000 or more and redraws at least £5,000 within 30 days, the repayment is ignored for section 455 purposes to the extent of the lower of the two figures. A separate rule covers arrangements where the repayment is funded by a fresh loan from the company under any wider arrangement, with no 30-day cut-off and no minimum amount.
A genuine repayment, funded from the director's personal resources or from a properly declared dividend, sits outside these rules. An artificial cycle does not. Owners considering a quick repayment-redraw should assume HMRC will see through it and plan instead to clear the balance permanently before the nine-month cut-off.
How to clear an overdrawn DLA without making things worse
- Pay the director enough salary to cover the balance, taking the PAYE and National Insurance cost into account.
- Declare a dividend, subject to having sufficient distributable reserves, and use it to clear the DLA.
- Have the director introduce personal funds to the company, by transfer from a personal account.
- Where the company genuinely owes the director for expenses or unpaid prior salary, post those credits to the DLA, supported by documentation.
- Avoid funding the repayment from a fresh company loan, which falls inside the anti-avoidance arrangements rules.
For a director already operating in the marginal corporation tax band, the choice between salary and dividend to clear the DLA has knock-on effects on the company tax bill. The corporation tax saving on a deductible salary partly offsets the personal PAYE cost. Dividends are not deductible but carry no employer National Insurance. A short modelling exercise before year-end usually shows which route costs least overall.
Disclosure on the company accounts
Whatever reporting framework the company uses, the DLA has to be disclosed. Under FRS 102 Section 1A and full FRS 102, advances and credits to directors are disclosed in a related-party note showing opening balance, movements in the year, closing balance and the maximum balance during the year. Under FRS 105 the disclosure is shorter but the underlying record still has to be kept and produced if HMRC enquires. The accounts going to Companies House therefore make an overdrawn DLA visible to anyone who reads them, including HMRC, lenders and potential investors.
Common errors with the DLA
- Treating round-sum withdrawals as dividends without a formal declaration and minute, which leaves them sitting as an overdrawn loan instead.
- Forgetting to post personal expenses paid by the company to the DLA, so the balance is understated until year-end clean-up.
- Repaying just before the nine-month cut-off and redrawing within 30 days, triggering the bed-and-breakfasting rule.
- Missing the £10,000 beneficial-loan benefit-in-kind when the balance briefly tipped over the threshold during the year.
- Assuming the section 455 charge is permanent and absorbing it into the cost base, rather than reclaiming once the loan is repaid.
Planning the DLA across multiple years
Where a director has been running a persistently overdrawn DLA for several years, the priority is to break the cycle once rather than repeat the same scramble at every year-end. Practical patterns include scheduling a larger interim dividend mid-year to bring the DLA back to credit, reviewing personal cash needs at the start of the year and matching them to a declared remuneration plan, and treating any unavoidable overdraw as a short-term position to be repaid before the section 455 cut-off rather than left to roll. The deadlines are the same as the corporation tax payment deadlines covered in the CT600 and annual accounts filing deadlines spoke, which makes them easy to fold into the same year-end calendar.
Frequently asked questions
Is a small overdrawn DLA always a problem?
No. A small balance that is cleared within nine months of the year-end and stays under £10,000 during the year carries neither a section 455 charge nor a benefit-in-kind. The DLA only becomes a problem when it sits overdrawn at the nine-month cut-off, or when it exceeds £10,000 without the director paying interest at the official rate.
Does section 455 apply to loans to family members?
Section 455 applies to loans to participators and also to associates of participators, which includes spouses, civil partners, children, parents and certain other relatives. A loan from a close company to the director's spouse can therefore trigger the same charge as a loan to the director themselves.
Can the company charge interest to avoid the BiK?
Yes. Where the director pays the company interest at or above HMRC's official rate on the loan balance, the beneficial-loan benefit-in-kind is removed. The interest received by the company is taxable in the company as non-trading loan relationship income. This still does not avoid the section 455 charge if the loan is outstanding at the nine-month cut-off, so the two issues need to be managed separately.