Understanding overdrawn director's loans
A Director's Loan Account (DLA) records all transactions between a director and their limited company that are not regular salary, expense reimbursements, or formal dividend payments. When you withdraw more money from the company than you have injected or are owed, your DLA becomes overdrawn.
An overdrawn director's loan triggers two distinct UK tax mechanisms: Section 455 Corporation Tax levied on the business, and Benefit in Kind (BIK) rules applied to the director if the loan is interest-free or charged below HMRC's official interest rate.
Section 455 Corporation Tax rules
If an overdrawn director's loan is not repaid in full within 9 months and 1 day after the end of your company's accounting period, the company must pay Section 455 Corporation Tax to HMRC. The current s455 tax rate is 33.75% of the outstanding loan balance, aligning with the upper dividend tax rate.
Section 455 tax is a temporary penalty charge rather than a permanent tax. Once the director repays the loan in full or in part, the company can reclaim the corresponding s455 tax from HMRC. However, HMRC only refunds this tax 9 months after the end of the accounting period in which the repayment was made.
Beware of anti-avoidance 'bed and breakfasting' rules. Under Section 464C CTA 2010, if you repay a loan of 5,000 pounds or more and redraw another loan of 5,000 pounds or more within 30 days, HMRC disregards the repayment, and Section 455 tax remains due.
Benefit in Kind (BIK) and the 10,000 pound threshold
Under Section 180 of ITEPA 2003, small loans are exempt from Benefit in Kind rules. If the total balance of all loans you owe to your company does not exceed 10,000 pounds at any point during the tax year, there is zero Benefit in Kind tax, and no P11D reporting is required.
If your loan balance exceeds 10,000 pounds at any time, the entire loan becomes a taxable cheap loan under Section 175 ITEPA 2003. The cash equivalent benefit is calculated by multiplying the average loan balance by HMRC's official rate of interest (currently 3.75%), minus any interest you actually paid to the company.
The director pays personal income tax on this cash equivalent at their marginal tax rate (20% basic, 40% higher, or 45% additional rate). The company must report the loan on form P11D Section H and pay Class 1A National Insurance on the benefit at 13.8% (increasing to 15.0% from April 2025).
Worked example: 25,000 pound overdrawn loan
Suppose a higher rate (40%) director borrows 25,000 pounds interest-free from their company and does not repay it before the 9-month corporation tax deadline:
1. Section 455 Corporation Tax: 25,000 pounds multiplied by 33.75% equals 8,437.50 pounds due from the company.
2. Taxable Benefit in Kind: Because 25,000 pounds exceeds the 10,000 pound threshold, benchmark interest at HMRC's 3.75% rate equals 937.50 pounds.
3. Director's personal income tax: 937.50 pounds multiplied by 40% equals 375.00 pounds due via Self Assessment.
4. Company Class 1A NIC: 937.50 pounds multiplied by 13.8% equals 129.38 pounds.
Total initial tax outflow across company and director is 8,941.88 pounds, of which 8,437.50 pounds is reclaimable upon loan repayment.
How to clear an overdrawn director's loan
There are three common compliant ways to settle an overdrawn DLA: repaying personal cash into the company bank account, declaring a formal dividend to credit the DLA (subject to dividend tax and available company profits), or processing a salary or bonus through payroll (subject to PAYE income tax and NICs).
Writing off or releasing a director's loan also incurs income tax on the director as dividend income, while the company cannot claim corporation tax relief on the written-off amount.
Inputs for the director's loan calculator
Director's loan amount
The total outstanding overdrawn balance borrowed from the company.
Repayment timing
Indicate whether the loan is repaid within 9 months and 1 day of your company's accounting year-end. Choosing unpaid triggers the 33.75% Section 455 Corporation Tax calculation.
Interest rate charged by company
The annual interest rate the director actually pays to the company. Enter 0% if the loan is interest-free.
Borrower's income tax rate
The marginal tax rate of the director (20% basic, 40% higher, or 45% additional rate) used to compute income tax on the Benefit in Kind.
Tax year
The UK tax year, defining statutory HMRC official interest rates and employer Class 1A NIC percentages.
Months loan was held in tax year
Number of months during the tax year that the loan remained outstanding, allowing accurate pro-rata BIK calculation.
CALCULATOR QUESTIONS
Directors loan calculator questions
What is an overdrawn director's loan account?
An overdrawn director's loan account occurs when a company director takes money out of the limited company that is not classified as salary, dividend, or approved business expense reimbursement, meaning the director owes money back to the company.
What is the Section 455 tax rate and when is it due?
Section 455 Corporation Tax is charged at 33.75% on any director's loan balance that remains unpaid 9 months and 1 day after the end of the company's accounting period. It is reported on the CT600A form and paid alongside standard Corporation Tax.
Can my company get Section 455 tax back from HMRC?
Yes. When the loan is repaid, written off, or released, the company can reclaim the s455 tax from HMRC using form L2P or via the company tax return. HMRC repays the tax 9 months after the end of the accounting period in which the loan was repaid.
When does a director's loan become a taxable Benefit in Kind?
A director's loan becomes a taxable Benefit in Kind if the balance exceeds 10,000 pounds at any point in the tax year and the company charges interest at a rate lower than HMRC's official rate of interest (3.75%). If the balance stays at or below 10,000 pounds throughout the year, it is completely exempt.
Can I pay interest to the company to avoid Benefit in Kind tax?
Yes. If the director pays interest to the company at or above HMRC's official rate of interest (3.75%) by the end of the tax year, there is no taxable benefit, no P11D reporting is required, and no Class 1A NIC is due. However, this does not clear the principal balance for Section 455 purposes.
What are the 30-day bed and breakfasting rules?
Under anti-avoidance legislation (Section 464C CTA 2010), if a director repays a loan of 5,000 pounds or more and withdraws 5,000 pounds or more within 30 days, the repayment is disregarded for Section 455 tax purposes. This stops directors from temporarily repaying loans just before the year-end deadline to avoid tax.