Under the Microscope: Is Your Director's Loan Account a Red Flag for HMRC?
By Sam | 25 September 2026
For a limited company director, a Director’s Loan Account (DLA) can be a useful way to record money moving between you and your company. It can also create unexpected tax problems if transactions are not recorded correctly or a balance remains outstanding for too long.
Self Assessment support through Accountant Search is available from £300 inc VAT per return. Company accounting support can be matched from £85pm+, depending on the company’s size, services and level of support required.
This guide explains when a Director’s Loan Account may attract HMRC’s attention, how the Section 455 tax charge works in 2026/27, what the £10,000 benefit-in-kind threshold means and why temporarily repaying and re-borrowing money may not solve the problem.
What is a Director’s Loan Account?
A Director’s Loan Account records money owed between a director and their company.
The account may show that:
- The company owes money to the director
- The director owes money to the company
- The balance moves between the two during the year
A credit balance usually means the company owes the director money. This may happen when you pay company costs personally or lend money to the company.
An overdrawn or debit balance means that you owe money to the company. This can happen if you:
- Take money from the company that is not salary or a properly declared dividend
- Use the company bank account for personal spending
- Take cash advances
- Receive money that has been posted incorrectly
- Withdraw more than the company can legally pay as dividends
An overdrawn DLA is not automatically a problem. The risk arises when the balance is not monitored, the transactions are not supported by records or the loan remains outstanding beyond the relevant deadlines.
When does Section 455 tax apply?
Section 455 applies broadly where a close company lends money or provides an advance to a shareholder-director or another individual connected with a shareholder.
If the loan remains outstanding nine months and one day after the end of the company’s Corporation Tax accounting period, the company may have to pay a Section 455 tax charge.
The charge is paid by the company. It is not normally treated as the director’s personal income simply because the loan exists.
For a growing limited company, the practical calculation is important:
- A loan made between 6 April 2022 and 5 April 2026 is generally subject to the 33.75% Section 455 rate.
- A loan made or benefit conferred on or after 6 April 2026 is subject to the 35.75% rate for 2026/27.
- The relevant rate depends on when the loan or advance was made, so an account containing several advances may need to be reviewed transaction by transaction.
For example, if a £20,000 loan made after 6 April 2026 remains outstanding at the relevant date, the Section 455 charge could be £7,150 at 35.75%.
This is a temporary tax charge rather than necessarily a permanent cost. If the loan is later repaid, released or written off, the company may be able to reclaim the Section 455 tax, subject to the applicable rules and waiting periods. Interest paid on the Section 455 charge is generally not reclaimed.
You can review HMRC’s technical guidance on loans to participators and the Section 455 charge.
The £10,000 benefit-in-kind threshold
The Section 455 rules and the benefit-in-kind rules are separate. Both may apply to the same Director’s Loan Account.
If you are a shareholder-director and owe your company more than £10,000 at any time during the tax year, the loan may be treated as a beneficial loan.
The threshold is tested during the year. It is not enough to look only at the balance on 5 April or at the company year end.
A benefit-in-kind may arise where:
- The loan exceeds £10,000
- The company charges no interest
- The interest charged is below HMRC’s official rate
The taxable benefit is generally based on the difference between the official rate of interest and the interest you actually pay. The company will usually need to report the benefit and account for the relevant employer National Insurance liability.
The director may also need to report the benefit on their personal tax return. This means a loan can create personal tax reporting responsibilities even when the company avoids a Section 455 charge by repaying the balance within the relevant period.
The two rules can therefore operate independently:
- A loan may create a benefit-in-kind even if it is repaid before Section 455 becomes due.
- A smaller loan may still create a Section 455 issue if it remains outstanding, even though it does not exceed the £10,000 benefit-in-kind threshold.
HMRC’s general guidance on money owed to your company through a director’s loan explains the main reporting responsibilities.
Why “bed and breakfasting” can be risky
Some directors try to avoid the Section 455 charge by repaying the DLA shortly before the company’s deadline and then taking out another loan soon afterwards.
This is commonly known as bed and breakfasting. It is not a safe shortcut.
Anti-avoidance rules can apply where a loan of more than £5,000 is repaid and another loan of £5,000 or more is made within a short period, including the 30 days before or after repayment.
In those circumstances, HMRC may treat the repayment as clearing the newer loan rather than the original loan. The original Section 455 exposure may therefore remain.
There are also provisions for larger loans where arrangements exist to take out another loan when the first one is repaid.
The key point is simple: repaying money temporarily and immediately borrowing it again may not permanently clear the DLA. If you are planning a repayment or re-borrowing arrangement, obtain professional advice before moving the money.
Five records every company should keep
A clean DLA starts with clear records. Your bookkeeping should show the date, amount, purpose and treatment of every transaction.
Keep:
1. A running balance
Review the DLA regularly rather than waiting for the year-end accounts. Monthly checks can identify an overdrawn balance while there is still time to deal with it.
2. Evidence for personal and business transactions
Keep receipts, invoices, bank statements and explanations for payments made from either the company or personal account.
3. Details of repayments
Record when money is repaid, where it came from and which part of the loan it relates to. Avoid describing a repayment as a dividend unless the company has sufficient distributable profits and the correct paperwork has been prepared.
4. Interest calculations
If interest is charged on the loan, record the rate, calculation and date of payment. This may affect the benefit-in-kind calculation.
5. Board and dividend paperwork
Keep minutes, dividend vouchers and supporting accounts where money is taken as salary, dividend or repayment of money previously lent to the company.
How to reduce the risk of an HMRC problem
A Director’s Loan Account is less likely to become a red flag when it is reviewed as part of the company’s normal financial controls.
Consider these steps:
- Separate company and personal spending. Use the company account only for legitimate company transactions.
- Reconcile the DLA monthly. Do not rely on a year-end adjustment to explain a large balance.
- Budget for tax. If a loan may remain outstanding, estimate the potential Section 455 charge before the deadline.
- Check the £10,000 threshold throughout the year. A temporary peak can still create a benefit-in-kind issue.
- Do not use artificial repayment patterns. A repayment followed by rapid re-borrowing may trigger anti-avoidance rules.
- Ask for advice before taking money out. Your accountant can consider salary, dividends, expenses, loans and cash flow together.
If you are searching for an accountant near me to support a growing limited company, review our guide to finding an accountant for a small business or explore limited company accountant support.
You can also review the wider services matched through Accountant Search, including company accounts, Corporation Tax, bookkeeping and payroll.
Self-Assessment tick-box for directors
Your company’s Corporation Tax return is separate from your personal Self Assessment tax return.
You may need Self Assessment support if you have:
- Dividends
- A taxable benefit-in-kind
- Income from property or another business
- Other untaxed income
- A Director’s Loan Account that has been written off or released
Self-Assessment tick-box: If you need help with your personal tax return, tick the Self Assessment option when completing the SA registration form. Include details of any director’s loan, dividends, benefits and other income so that the request can be matched accurately.
For deadline information, check the current Self Assessment deadlines.
Self Assessment support is priced at £300 inc VAT per return. This is separate from company accounting, which can be matched from £85pm+.
Find suitable support before the balance becomes a problem
Accountant Search is a curated directory and digital matchmaking/referral platform, not an accountancy practice. You provide details about your company and the help you need, and the platform can introduce you to accountants who may be suitable for your requirements.
If your Director’s Loan Account is overdrawn, growing or difficult to reconcile, provide those details in your business enquiry form. Mention whether you need company accounts, Corporation Tax support, DLA advice, bookkeeping or personal Self Assessment assistance.
A Director’s Loan Account is not automatically a warning sign. An unexplained, repeatedly overdrawn or artificially cleared balance is more likely to cause concern. Regular reviews, accurate records and timely advice can help your company avoid unnecessary tax costs and keep its reporting position clear.
This article provides general information for UK limited companies and growing SMEs. Director’s Loan Account rules can depend on the exact transactions, dates, company structure and repayment arrangements. Obtain advice on your own circumstances before taking action.