Directors' Loan Accounts Explained

** New 2025-26 Edition Available Now **

Directors’ Loan Accounts for Personal and Family Companies

By Sarah Bradford BA (Hons), FCA, CTA (Fellow)

A director’s loan account records the transactions between a director and their personal or family company. Borrowing money from the company can be a cheap source of finance, and interest can be paid to the director if the account is in credit. But if the account is overdrawn, tax charges can arise on both the company and the director, and anti-avoidance rules apply.

In this guide, updated for 2025/26, Chartered Accountant and Chartered Tax Adviser Sarah Bradford explains the planning opportunities and pitfalls associated with the use of directors’ loan accounts: when section 455 tax and benefit-in-kind charges arise, the different ways of clearing an overdrawn account and what each one costs in tax, and when it may be better to leave the loan outstanding.

What Is a Director’s Loan Account?

A director’s loan account is a mechanism for keeping track of the transactions between the director and their personal or family company. Typical entries include loans by the director to the company and by the company to the director, loan repayments, salary, dividend and bonus payments credited to the account, personal bills paid by the company on the director’s behalf, company bills paid by the director, and shares issued on incorporation but not paid for.

At the end of the year, the account is in credit if the company owes the director more than the director owes the company, and overdrawn if the director owes the company money. An overdrawn account is, in effect, a loan to the director, and the meaning of ‘loan’ is much wider than a formal loan agreement: paying for a family holiday on the company credit card, for example, creates a loan from the company to the director.

Overdrawn Accounts, Section 455 Tax and Benefit-in-Kind Charges

Special tax rules apply to close companies, which are controlled by a small number of people. Where a loan to a participator (most directors of close companies are participators) is still outstanding nine months and one day after the end of the accounting period in which it was made, the company must pay section 455 tax on the balance. The rate is aligned with the dividend upper rate, so HMRC effectively recovers the tax the director would have paid on a dividend of the same amount taxed at that rate. The tax is refundable once the loan is cleared, but not until nine months and one day after the end of the accounting period in which it is cleared, and only if a claim is made.

A benefit-in-kind charge may also arise on the director, with a Class 1A National Insurance liability for the company, if the balance is more than £10,000 at any point in the tax year. And clearing the account has its own cost: a salary or bonus can attract income tax and National Insurance, a dividend is taxed at the dividend rates, and writing the loan off brings income tax and National Insurance too. Depending on the method used and the director’s marginal rate of tax, clearing the loan can cost more than paying the section 455 tax, so there is no substitute for doing the sums.

This guide explains how to use directors’ loan accounts correctly while avoiding some of the more common tax traps around them.

What This Report Covers

Updated for 2025/26, this guide is set out in 11 chapters with 26 worked examples, practical points and traps, and covers:

• What is a director’s loan account?
• Overdrawn directors’ loan accounts
• What is a close company and why does it matter?
• The meaning of ‘loan’ in director’s loan account
• The s455 tax charge
• Clearing an overdrawn director’s loan account
• Benefits in kind
• Tax planning opportunities
• Anti-Avoidance
• Directors’ loan accounts in credit
• Directors’ loan account toolkit

And much more.

Close companies, participators and the meaning of ‘loan’

What makes a company close, who counts as a participator (a family member who holds shares will generally be one, even if they are not a director), and why a loan to a participator who is not a director is caught while a loan to a director who is not a participator is not. The guide explains how widely ‘loan’ is drawn and what does not count as one, including unpaid share capital, debts for goods and services supplied in the ordinary course of trade, small loans of up to £15,000 to full-time directors or employees without a material interest and loans made in the ordinary course of a moneylending business, as well as how indirect loans through an associated company are caught.

The section 455 charge and reclaiming the tax

How the trigger date works, why the charge applies only once and is paid with, but is not, corporation tax, and why the rate depends on the dividend upper rate when the loan was made rather than when the tax falls due. It covers disclosure on form CT600A, why the tax may not be repaid for up to 21 months after a loan is cleared, clearing the loans charged at the highest rate first to maximise the refund, and how to claim a repayment through the company tax return or on form L2P within the four-year time limit.

Clearing an overdrawn director’s loan account

The main ways of clearing an overdrawn balance (introducing funds, declaring a dividend, paying a salary or bonus, and writing the loan off) and the tax and National Insurance consequences of each. Worked examples show how large a dividend or bonus must be for the director to have enough left after tax to clear the loan, why a salary below the National Insurance thresholds and covered by an unused personal allowance can be an effective route, and why a write-off is taxed as a distribution through self-assessment but treated as earnings for National Insurance.

Benefit-in-kind charges on cheap and interest-free loans

When a loan of more than £10,000 triggers a benefit-in-kind charge, the exemptions that may still apply, and how the cash equivalent is worked out using the official rate of interest, which HMRC may amend quarterly from April 2025. The guide compares the normal averaging method with the alternative precise method, which the director can elect for and HMRC can insist on, and covers Class 1A National Insurance and reporting the benefit on forms P11D and P11D(b).

Tax planning: clear the loan or pay the section 455 tax?

How a participator can enjoy an interest-free loan of up to £10,000 tax-free for up to 21 months, and why a larger loan can still be a cheap source of finance after the benefit-in-kind charge. The guide compares the tax and National Insurance cost of clearing a loan by dividend or bonus with the section 455 tax, and explains why it can be better to pay the section 455 tax, which is refundable, and clear the loan later when the director’s marginal rate of tax is lower, as well as the cash flow effect on the company.

Anti-avoidance, accounts in credit and HMRC’s toolkit

Why bed and breakfasting has been rendered largely ineffective, how the 30-day rule applies to repayments of more than £5,000 and the intentions and arrangements rule to balances of at least £15,000, why neither applies to a loan cleared by a dividend, salary or bonus, the rules strengthened from 30 October 2024 where the targeted anti-avoidance rule applies, and the charge on arrangements that confer a benefit on a participator. The final chapters cover accounts in credit, where the company can pay the director interest but must deduct basic-rate tax and report it on form CT61, and HMRC’s directors’ loan account toolkit of common mistakes.

Who Will Benefit From This Report?

This guide is perfect for company directors who want to reduce their tax liability, stay on the right side of the law and avoid the common UK tax traps around directors’ loan accounts. Get your copy today to learn more about the most efficient uses of directors’ loan accounts.

The report is also popular among accountants and tax professionals, as seen in our testimonials. It gives them an in-depth understanding of directors’ loan accounts and how to use them to maximise tax efficiency for their clients.

About Sarah Bradford FCA CTA

Sarah Bradford BA (Hons), FCA, CTA (Fellow) is a Chartered Accountant and Chartered Tax Adviser. She is a director of Writetax Ltd, a company providing technical writing services on tax and National Insurance.

Sarah writes widely on tax and National Insurance and contributes regularly to Business Tax Insider, Property Tax Insider and Tax Insider Professional, as well as to Tax Insider guides including ‘How to Maximise Deductions for Business Expenses’.

Read an excerpt from this report: Clearing an overdrawn director’s loan account - declaring a dividend.