Director’s Loan Account in the UK: How s455 Tax, Repayments, and Record-Keeping Work

If you’re a director of a UK limited company and you’ve borrowed money from your own business, you’re dealing with a director’s loan account. It’s not a personal bank account. It’s a formal record inside your company’s books that tracks every penny you take out or put in beyond salary or dividends. And if you don’t handle it right, you could face a surprise tax bill - sometimes over 30% of the amount you borrowed.

What Exactly Is a Director’s Loan Account?

A director’s loan account is a ledger that shows how much money you, as a director, owe to your company - or how much the company owes you. It’s not optional. Every time you withdraw cash from your company that isn’t a salary, dividend, or expense reimbursement, it goes into this account as a debit (you owe the company). Every time you deposit personal money into the company, it’s a credit (the company owes you).

For example, if you take £10,000 from your company’s bank account to pay for a family holiday, that’s a £10,000 debit on your loan account. If you later pay £5,000 back into the company’s account, that’s a £5,000 credit. Your balance is now £5,000 owed to the company.

HMRC treats this like a personal loan from the company - not a gift. And if that balance is still over £10,000 at the company’s year-end, you’re in the red zone.

Why s455 Tax Is the Biggest Risk

The most dangerous part of a director’s loan account is s455 tax. This is a tax charged by HMRC on any outstanding loan balance that remains more than nine months after your company’s accounting year-end.

Let’s say your company’s financial year ends on March 31. You’ve got £15,000 still owed to the company by you, the director, as of that date. If you haven’t paid it back by January 1 of the next year - nine months after the year-end - HMRC will slap a 33.75% tax charge on that £15,000. That’s £5,062.50 you didn’t plan for.

This isn’t a penalty. It’s a temporary tax. If you repay the loan later, HMRC will refund the s455 tax. But you’ll have to wait up to four years for that refund, and you’ll need to file a claim. Most directors forget this part - and end up paying cash they don’t have, then waiting years to get it back.

The tax rate changed in April 2022. Before that, it was 32.5%. Now it’s 33.75%. And it applies to any loan balance over £10,000 at the nine-month mark. Even if you’re planning to repay next month, if you haven’t done it by the deadline, the tax hits.

How to Avoid s455 Tax

The only way to dodge s455 tax is to repay the full loan balance - or reduce it below £10,000 - within nine months of your company’s accounting year-end.

Here’s how real directors do it:

• Pay back the loan using personal funds before the deadline.
• Convert the loan into a salary payment (but only if your company can afford it and you’re within your personal allowance).
• Turn the loan into a dividend - if your company has enough retained profits and you’re not over your dividend allowance.
• Write off the loan as a bonus - but this triggers income tax and National Insurance for you, and corporation tax for the company. It’s rarely worth it.

Some directors try to time their repayments to land right at the nine-month deadline. That’s risky. If the payment clears a day late, you’re taxed. Always aim to repay at least two weeks early.

Record-Keeping: What HMRC Actually Checks

HMRC doesn’t care if you’re “just borrowing a little.” They care about paper trails. If you’re audited, they’ll ask for:

• A clear, dated record of every loan withdrawal and repayment.
• Board minutes approving any loan over £10,000.
• Proof that the loan was documented - even if it’s just an email saying, “I’m borrowing £8,000 for personal use.”
• Your company’s statutory accounts showing the director’s loan account balance.

Many directors think they’re fine because they “have a good relationship with their accountant.” That doesn’t matter. HMRC doesn’t care about your relationship. They care about documentation.

Use accounting software like QuickBooks, Xero, or Sage. Set up a separate ledger for your director’s loan account. Every transaction - whether you’re paying in or taking out - gets tagged as “Director’s Loan.” No exceptions. No cash under the table. No “I’ll remember it later.”

And don’t forget: if your loan account is overdrawn (you owe the company) and it’s more than £10,000, you must disclose it on your company’s annual return (Form CT600) and on your personal Self Assessment tax return.

What Happens If You Don’t Repay?

Ignoring the loan isn’t an option. If you don’t repay within nine months:

• HMRC charges s455 tax at 33.75% on the balance.
• You’ll pay income tax on any interest-free loan benefit - if the loan is over £10,000 and interest isn’t charged at the official rate (currently 4.75% as of 2025).
• Your company may lose corporation tax relief on the loan amount if it’s written off later.
• If you’re still overdrawn when you stop being a director, HMRC treats the balance as a final dividend - and taxes it as income.

There’s also a risk of personal liability. If your company goes bust and your loan account is overdrawn, the liquidator can demand repayment - even if you’re no longer a director. HMRC and insolvency practitioners don’t care about your personal circumstances. They care about what’s owed to the company.

Common Mistakes Directors Make

Here are the five most common errors - and how to fix them:

1. Using the company account like a personal ATM. Every withdrawal must be recorded. Even £50 for groceries. Use a separate business card and track everything.
2. Thinking small loans don’t matter. Even £1,000 adds up. And if you have multiple loans over time, they can push you over the £10,000 threshold.
3. Repaying in chunks. If you repay £3,000 in January and £7,000 in March, you’re still overdrawn at the nine-month deadline. Pay the full amount before the cutoff.
4. Not checking the balance before year-end. Run a director’s loan account report at least 60 days before your year-end. Fix problems early.
5. Assuming your accountant will handle it. Accountants don’t magically know your cash flow. You need to tell them what you’ve taken out.

When to Get Professional Help

You don’t need a tax lawyer to manage a director’s loan account. But you do need a qualified accountant who understands HMRC’s rules - especially if:

• Your loan balance is over £50,000.
• You’ve had multiple loans over several years.
• You’re planning to sell your company or bring in investors.
• You’re unsure whether to repay, convert, or write off the loan.

A good accountant will run your loan account report monthly. They’ll warn you when you’re approaching the nine-month deadline. And they’ll help you structure repayments to avoid s455 tax - without triggering other tax problems.

Don’t wait until the last month. Start tracking your loan account from day one. The sooner you build good habits, the less stress you’ll have later.

What If You’re a Former Director?

Even if you’ve left the company, your director’s loan account doesn’t disappear. If you still owe money, HMRC can still chase you. The company can also sue you for repayment.

If you’re no longer a director but your loan balance is still overdrawn, you must declare it on your personal tax return. The company must also report it as a “loan to a former director” on its accounts.

And if the company goes into liquidation, the liquidator will demand repayment - even if you’re retired or living abroad. This is one of the most common reasons former directors get hit with unexpected bills years after leaving.