The director's loan account: what it is, how the 35.75% tax charge is triggered, and how to avoid it

Every UK limited company maintains a director's loan account (DLA) — a running record of every financial transaction between the director and the company that is not classified as salary or dividend. If you transfer money from the company account to your personal account without formally recording it as a salary payment or declaring a dividend, that transfer sits in the DLA as a loan from the company to you. Equally, if you put your own money into the company to cover an expense, the DLA records what the company owes you. The balance can be in credit (company owes you) or overdrawn (you owe the company).

The tax charge that matters: Section 455 of the Corporation Tax Act 2010 (the S455 charge) applies when your DLA is overdrawn at the end of the company's accounting year, and that balance is not repaid within nine months of the year end. HMRC charges the company 35.75% of the outstanding overdrawn balance for loans made on or after 6 April 2026 — the rate tracks the dividend upper rate, which the Autumn Budget 2025 raised from 33.75% (loans made before that date keep the old 33.75% rate). This is a charge on the company, not on the director personally. The S455 charge is refundable — once the loan is repaid, HMRC refunds it — but the refund only comes nine months after the end of the tax year in which repayment was made. For a small company, paying 35.75% of, say, a £20,000 overdrawn DLA means a £7,150 tax charge that may sit outstanding for over a year before refund. The cash flow impact is severe.

The 30-day rule closes the obvious workaround: you cannot simply repay the DLA before the nine-month deadline and then re-draw the same amount immediately after. HMRC's bed-and-breakfasting rule treats any new loan taken within 30 days of repayment as continuous — the S455 charge applies as if the balance was never cleared. Directors who resolve the DLA crisis at year end only to reinstate the same arrangements in the new period find that HMRC applies the charge regardless.

The benefit-in-kind threshold: if your DLA balance exceeds £10,000 at any point during the tax year and you are not paying the company a market-rate interest on it (HMRC's official rate is typically around 2–3%), the difference between what you pay and what market rate requires is treated as a benefit-in-kind. You report this on a P11D form and pay personal income tax on the benefit. For Arab directors who are not UK PAYE employees (no P11D filed), this can create an unexpected liability. Most small UK companies only hit this issue when the DLA drifts above the £10,000 threshold informally.

The safest position is to keep the DLA in credit, meaning the company owes you rather than you owing the company. Depositing your own funds into the company to cover early-stage costs, for example, puts the DLA in credit immediately. When you subsequently draw money out, it comes back to you as a loan repayment from the company with no tax implications. Maintaining clear records of every transaction — salary, dividend, or loan entry — at the time it happens, rather than attempting a reconstruction at year end, is the single most effective way to avoid S455 charges and DLA disputes.