Limited Companies
Director's loan account: the tax trap hiding in your company
Every pound you take out of your limited company that isn't salary, a dividend, or a legitimate expense reimbursement is a loan from the company to you — and loans have tax consequences. The director's loan account is the most common thing we find mis-handled in owner-managed companies, and the fix is almost always cheaper before year-end than after.
What it actually is
It's a running record of money owed between you and your company. Take £500 for something personal from the business account, and you now owe the company £500 — the account is overdrawn. Put money in, and the company owes you. Plenty of directors dip in and out casually without realising the balance is building.
The s455 charge — the one that stings
If your loan account is overdrawn nine months and one day after your company's year-end, the company pays a 33.75% corporation tax charge on the outstanding balance. It's refundable once you repay the loan — but the refund comes slowly, and until then it's real cash out of the business. On a £30,000 overdrawn loan, that's £10,125 sitting with HMRC.
And the benefit in kind
Separately, if the loan exceeds £10,000 at any point in the year and you're not paying interest at HMRC's official rate, it's a taxable benefit in kind — reported on a P11D, with income tax for you and Class 1A NI for the company.
The trap people fall into
Repaying the loan just before the nine-month deadline and re-borrowing shortly after. HMRC anticipated this: the "bed and breakfasting" rules mean repayments of £5,000 or more followed by fresh borrowing within 30 days are matched against each other, and the loan is treated as never repaid. It doesn't work, and it looks like exactly what it is.
How to clear it properly
Three legitimate routes: repay it in cash; declare a dividend to clear the balance (only from available profits — an unlawful dividend is a bigger problem than the loan); or vote a bonus through payroll (deductible for the company, but PAYE and NI apply). Which is cheapest depends entirely on your income position for the year — this is a calculation, not a rule of thumb.
The habit that prevents all of it
Look at the loan account balance quarterly, not at year-end. In Xero it takes seconds. A balance you know about is a planning decision; one you discover in month nine is a tax bill. If yours has drifted and you're not sure where it stands, we'll map it and set out the cheapest way to clear it before the deadline bites.
This is general information, not advice for your circumstances. If you'd like it applied to your situation, get in touch — the first chat is free.
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