Most director-shareholders of small UK limited companies dip into the company’s bank account at some point — to cover a personal cash crunch, fund a deposit, or smooth income between dividend declarations. Done casually, that’s a director’s loan, and HMRC has a specific tax — S455 — designed to make sure overdrawn director’s loan accounts don’t quietly become tax-free income.
S455 is a temporary tax in the sense that you can claim it back when the loan is repaid. But you wait years for the refund, the rate is tied directly to the dividend upper rate — 33.75% for loans made before 6 April 2026, and 35.75% for loans made on or after 6 April 2026 (the Autumn Budget 2025 raised the higher dividend rate, and S455 rose automatically with it) — and there’s a separate anti-avoidance “bed and breakfast” rule that catches the obvious workaround. This guide walks through how the DLA works, when S455 bites, how to compute it, and the four practical ways to clear an overdrawn balance.
What a Director’s Loan Account Is
Every limited company keeps a running tally — formally a ledger account — between the company and each director. The director’s loan account (DLA) records:
- In your favour: salary owed but not yet paid, expense reimbursements, dividends declared but not yet paid, capital introduced.
- Against you: personal expenses paid by the company, cash you’ve taken out, company funds used for personal items, dividends paid in excess of what’s been declared.
Net the two and you get the balance. If the company owes you money (credit balance from the company’s perspective), no tax issue exists — the company can repay you tax-free at any time.
If you owe the company money (debit balance, often called “overdrawn DLA”), you have a director’s loan. That’s where the tax rules kick in.
The £10,000 Benefit-in-Kind Threshold
Provided your DLA stays overdrawn by no more than £10,000 throughout the entire tax year, HMRC ignores the benefit-in-kind angle entirely. No P11D entry, no Class 1A National Insurance.
The moment the DLA goes above £10,000 — even briefly — the full balance (not just the excess) is treated as a beneficial loan and an interest-free benefit-in-kind charge arises. The taxable benefit is calculated at the HMRC official rate of interest applied to the average balance.
For 2025-26, the HMRC official rate is 3.75% — it rose from 2.25% on 6 April 2025 and is unchanged for 2026-27. HMRC publishes the rate in Beneficial loan arrangements — HMRC official rates.
Example: Average overdrawn balance £40,000 across 2025-26.
- BIK = £40,000 × 3.75% = £1,500 taxable benefit.
- For a higher-rate director: £1,500 × 40% = £600 personal income tax.
- Company also pays Class 1A NIC at 15% on £1,500 = £225 employer NIC.
The BIK applies even if you actually pay the company interest at a market rate below the official rate. To avoid the BIK entirely, you must charge yourself at least the official rate and actually pay it within the tax year.
The 9-Month Deadline: When S455 Kicks In
This is the headline tax. S455 of the Corporation Tax Act 2010 applies a temporary corporation tax charge on any amount of director’s loan that remains outstanding 9 months and 1 day after the end of the accounting period in which the loan was made. The rate depends on when the loan itself was made, not when the charge falls due:
- Loans made 6 April 2022 – 5 April 2026: rate is 33.75%
- Loans made on or after 6 April 2026: rate is 35.75%
The 9-month deadline matches the corporation tax payment date for small companies, so S455 falls due at the same time as the company’s normal CT bill.
Worked timing example (a loan made before the 6 April 2026 rate change, so the 33.75% rate applies):
- Loan drawn during the year to 31 March 2025 (before 6 April 2026 — 33.75% rate applies).
- Corporation tax due date: 1 January 2026 (9 months + 1 day after year-end).
- If the DLA is still overdrawn on 1 January 2026, S455 = 33.75% of the outstanding balance, paid alongside the normal CT bill.
For a loan drawn on or after 6 April 2026 — for example during the year to 31 March 2027, with tax due 1 January 2027 — the rate is 35.75% instead: a £40,000 balance still outstanding at the deadline would attract £14,300 of S455, not £13,500.
Both rates were set deliberately to match the higher rate of dividend tax at the time the loan was made (33.75% matched the 2022–2026 higher dividend rate; 35.75% matches the higher dividend rate from 6 April 2026, per the Autumn Budget 2025). The policy logic: if a director-shareholder is essentially treating company funds as personal cash, they should pay broadly the same tax as if they’d paid themselves a higher-rate dividend.
S455 Is Refundable — But Slowly
Here’s where the “temporary” framing matters. S455 is fully refundable when the loan is eventually repaid (or written off, or otherwise cleared). But the refund mechanism is slow:
- You can claim the S455 refund only 9 months and 1 day after the end of the accounting period in which the loan was repaid.
- The refund is claimed on form L2P, sent with the Company Tax Return for the period of repayment (or on the CT600A if that return is for the period the loan was taken out), and HMRC repays the company using the details in its return or by cheque. You must claim within 4 years.
Cashflow worked example
- Year-end 31 Mar 2025 — £40,000 DLA outstanding.
- 1 Jan 2026 — S455 paid: £40,000 × 33.75% = £13,500, paid with the company’s normal CT bill.
- 1 Apr 2026 — director repays £40,000 to the company.
- Loan was repaid in the accounting period ending 31 Mar 2027.
- Refund claimable from 1 January 2028 (9 months + 1 day after 31 Mar 2027).
So you front £13,500 in January 2026 to get it back in January 2028 — 2 years of working capital tied up in HMRC. For a smaller company with tight cash, S455 is genuinely painful even though it’s “refundable”.
The Bed-and-Breakfast Anti-Avoidance Rules
The obvious workaround is to repay the loan just before the year-end (or the 9-month deadline) and then re-borrow immediately after. Finance Act 2013 closed this, and since 30 October 2024 the matching rules sit in CTA 2010 s 464ZA. Together with the rule on loans from companies a close company controls, there are three rules to know:
Rule 1 — The 30-day repayment-and-reborrow rule
If, within any 30-day period, you repay £5,000 or more and the company makes new loans of £5,000 or more to you or an associate (a spouse or other relative, for example) in a later accounting period than the loans being repaid, the repayment is matched to the new loans instead (up to their amount). The original loan is treated as still outstanding. A new loan counts only to the extent it is not itself repaid within those 30 days. A repay-and-reborrow inside the same accounting period does not trigger this rule, though S455 is still due on whatever is owed at the 9-month deadline.
Rule 2 — The arrangements rule (£15,000+)
Where, immediately before a repayment, you owe the company £15,000 or more, and at the time of the repayment arrangements had been made for new loans of £5,000 or more to replace some or all of the amount repaid, the repayment is matched to those new loans instead of the original one — even if the new loan comes more than 30 days later. CTA 2010 s 464ZA(3) tests the balance at that one moment, not at any point in the year, and asks whether the replacement borrowing had already been arranged.
This is a wider catch-all and harder to defend against. HMRC looks at facts and patterns, not just the calendar.
Rule 3 — Loans from a company the close company controls
S455 cannot be sidestepped by having a subsidiary make the loan. Where a company controlled by a close company lends to a participator, CTA 2010 s 460 treats the loan as made by the close company itself. The same applies if a close company acquires control of the lender after the loan, unless no arrangements connect the loan with that acquisition or with the close company funding the lender (s 461). Under s 455(5), a participator in a parent company is also treated as a participator in each company it controls. A loan from a sister company is not caught by s 460, but if that company is itself close and you are one of its participators, s 455 charges its own loan directly.
Practical takeaway: the bed-and-breakfast rules mean a repay-and-reborrow pattern within 30 days across an accounting period end, or any large repayment followed by an arranged reborrowing, does not clear the S455 charge. You must either fully clear the DLA with no reborrow plan, or live with the S455 charge.
Four Ways to Clear an Overdrawn DLA
If your DLA is heading into the danger zone before your CT due date, you have four practical options:
Option 1 — Repay in cash
The cleanest path. Director pays personal cash into the company. No tax consequence for the director (you’re returning borrowed money), no income to declare. Just make sure the repayment isn’t tagged with a 30-day reborrow under rule 1.
Option 2 — Declare a dividend to clear
The company declares a dividend in the director-shareholder’s favour, the dividend payment is then set off against the overdrawn DLA. No cash moves — the bookkeeping entries simply net.
The director picks up dividend income at their personal rates: 8.75% basic / 33.75% higher / 39.35% additional in 2025-26, rising to 10.75% basic / 35.75% higher / 39.35% additional from 6 April 2026 (post-£500 dividend allowance). This eliminates the S455 charge entirely because no loan remains outstanding.
This is the most common route for owner-managed companies. The director-shareholder usually plans dividends around the year-end specifically to clear any accumulated DLA.
Option 3 — Pay a bonus
The company pays a salary bonus, which is then set off against the DLA. The amount is fully PAYE + employee NI + employer NI taxable — usually worse than Option 2 unless there’s a specific reason (e.g., generating pensionable earnings for AA carry-forward).
Option 4 — Write off the loan
The company formally writes off the loan. The written-off amount is treated as dividend income of the director (the statute lists the release of a loan to a participator as dividend income) — taxed at 8.75%/33.75%/39.35% in 2025-26, or 10.75%/35.75%/39.35% from 6 April 2026, depending on which band it falls into, with the £500 dividend allowance shared with any other dividends you receive. There may also be Class 1 NICs implications if the director is also an employee.
The company gets no corporation tax deduction for the write-off. This is usually a last-resort option when the director genuinely can’t repay.
Decision Framework
| Situation | Action |
|---|---|
| DLA never goes above £10,000 at any time in the year | No BIK. S455 has no minimum: clear the balance before the 9-month deadline or S455 is due on whatever is left. |
| DLA between £10k and £50k, can be cleared by year-end | Declare dividend to clear before 9-month deadline. |
| Large DLA, cash available | Repay in cash; don’t reborrow within 30 days. |
| Large DLA, no cash, want to avoid PAYE/NICs | Declare dividend if profits available — accept higher-rate dividend tax. |
| Large DLA, no cash, no profits, no recovery plan | Accept the S455 charge; document write-off rationale if applicable. |
Common Mistakes
Drifting balance — director draws cash monthly with no formal review until the accountant prepares the year-end. By that point, the balance may exceed £30k and the dividend decision is forced. Run a DLA reconciliation quarterly.
Forgetting the BIK — DLA stays above £10k for 8 months of the year and is cleared 2 months before year-end. The BIK still applies on the average balance for those 8 months; both a P11D and Class 1A NIC are due.
Forgetting paperwork on dividends — dividends used to clear DLA must be legally declared with board minutes, dividend voucher, and sufficient distributable reserves. HMRC routinely challenges undocumented dividends and recharacterises them as salary (PAYE + NICs) or loans (S455).
Confusing the corporation tax deadline with S455 — these share the 9-month date but are independent charges. The company can pay its normal CT but forget S455 if no one runs the DLA reconciliation.
Run the Numbers
Modelling the dividend cost of clearing a large DLA — versus the cashflow cost of S455 — usually comes down to your personal marginal dividend rate. The dividend tax calculator runs the personal-side tax on the dividend you’d need to declare to clear the loan, and the corporation tax calculator shows whether the company has the distributable profits to support it.
Related Reading
- Dividend tax explained — how the 8.75%/33.75%/39.35% rates and £500 allowance work in 2025-26.
- Dividend tax rise April 2026 — flagged changes that affect the cost of clearing a DLA via dividend in 2026-27.
- Sole trader vs limited company — structural choice that determines whether DLA mechanics apply to you at all.
- Corporation tax rates 2025-26 — 19%/25% with marginal relief, the bill S455 is paid alongside.
FAQs
My DLA is £4,000 overdrawn. Do I owe anything?
No benefit-in-kind charge: the £10,000 BIK threshold means a balance that never goes above £10,000 carries no income tax or NIC liability. S455 has no such threshold, though. If any of the £4,000 is still outstanding when S455 falls due (the day after the 9 months from the year-end), the company owes S455 on that amount. For a balance this size you’d typically clear it with a small dividend or a simple repayment well before then. Keep records of the running balance in case it grows.
Can I just write off the loan to avoid S455?
Yes, but you trade the S455 charge for personal dividend tax on the written-off amount, with no corporation tax deduction for the company. For an additional-rate director, writing off £40,000 generates up to a £15,740 personal dividend tax bill (£40,000 × 39.35%, unchanged by the 2026 dividend-rate rise, before any unused £500 dividend allowance) versus an S455 charge that’s refundable in ~2 years — £13,500 if the loan was made before 6 April 2026 (33.75%), or £14,300 if made on or after 6 April 2026 (35.75%). Write-off is rarely the cheaper option unless the director can never repay and the company is closing.
Does S455 apply if I’m the only shareholder and director?
Yes. S455 applies to any “close company” (broadly, controlled by 5 or fewer participators) making a loan to a participator or their associate — single-director companies are squarely in scope. The fact that you’re “lending to yourself” is exactly what the rule was designed to catch.