Can I just declare a dividend to clear the loan?

Often yes, and it is the usual solution — but only if the company has enough distributable reserves, meaning accumulated post-tax profit. Declaring a dividend the company cannot fund makes it unlawful, and an unlawful dividend simply reverts to being a director's loan, so you end up back where you started with worse paperwork. Check the reserves first, then declare it properly with a board minute and a dividend voucher dated on the day. The dividend is taxable on you at 10.75%, 35.75% or 39.35% for 2026-27 depending on your other income, so the tax does not vanish — it moves from the company to you, usually at a lower total cost.

What if the company owes me money instead of the other way round?

Then there is no tax issue at all. A director's loan account in credit means you have put your own money into the business, and you can draw it back out whenever the company has the cash, with no income tax, no National Insurance and no section 455 charge, because you are being repaid rather than paid. It is genuinely one of the most tax-efficient things you can withdraw from a company. The only requirement is that it is properly recorded, so the money you introduced is evidenced. If it was never written down, reconstructing it from bank statements years later is possible but tedious.

Do I have to charge myself interest on the loan?

You do not have to, but it is frequently the cheaper option. If the balance goes over £10,000 at any point in the tax year and the company charges you nothing, you have a taxable benefit measured against HMRC's official rate of 3.75% from 6 April 2026. That means personal income tax for you and Class 1A National Insurance at 15% for the company. If instead the company charges you interest at 3.75% or above and you actually pay it, there is no benefit to report and no P11D entry. The interest is taxable income in the company, but it stays inside your business rather than going to HMRC.

Is having a director's loan illegal?

No. Loans to directors are perfectly lawful and extremely common. Under the Companies Act a loan to a director generally needs shareholder approval once it exceeds £10,000, which for a typical owner-managed company means approving it yourself and minuting that you did. The real risks are elsewhere: the tax charges described above, and the fact that an overdrawn loan account becomes a debt the company can call in. If the business later becomes insolvent, a liquidator will pursue you personally for the balance, and that is the scenario that turns an administrative untidiness into a genuinely serious problem.

What if I genuinely cannot repay before the nine months are up?

Then pay the section 455 charge and plan the recovery, rather than manufacturing a repayment that will not survive scrutiny. The charge is refundable once the loan is actually cleared, so it is a cashflow cost rather than a permanent one — but the refund arrives on the due date for the accounting period in which you repay, which can be well over a year later. Budget for it that way. What you should not do is clear the balance days before the deadline and redraw it days after: the 30-day matching rule catches exactly that, and you end up paying the tax anyway while looking as though you tried to avoid it.

Director's loan accounts, explained

If you run a limited company, you have almost certainly taken money out of the business at some point that was not quite salary and not quite a formal dividend. A personal bill covered in a tight month. A transfer to your own account because the company had cash and you did not. Every one of those sits in the director's loan account, and if the balance is still owed to the company nine months after your year end, it triggers a tax charge that catches people out every single year.

This is what a director's loan account is, what it costs when it goes wrong, and the specific dates that decide whether it costs you anything at all.

What a director's loan account actually is

It is a running record of money moving between you personally and the company that is not salary, not a declared dividend, and not the reimbursement of a genuine business expense. Take money out that has not been formally declared as one of those, and it is a loan from the company to you. Put your own money in to cover a shortfall, and the account runs the other way: the company owes you, and you can draw that back out at any time with no tax consequence whatsoever.

Both directions are entirely normal. The company's money is not automatically yours, even when you own all the shares, so the law needs a category for withdrawals that are neither wages nor a distribution of profit. That category is the loan account. Nothing about having one is wrong, unusual, or a sign of bad bookkeeping.

The nine-month deadline that decides everything

Section 455 of the Corporation Tax Act 2010 is the rule that matters. If the loan account is overdrawn — you owe the company — at the end of an accounting period, and it is still overdrawn nine months and one day after that period ends, the company pays tax on the outstanding balance. That date is not a coincidence: it is the same day your corporation tax for the period falls due.

So for a 31 March 2027 year end, the balance that counts is measured at 31 March 2027, and the deadline to clear it is 1 January 2028. Repay it in full before that date and there is no section 455 charge at all. Repay half of it and the charge applies only to the half still outstanding. This is the single most useful thing to know about director's loans, because it means the tax is almost always avoidable if somebody is watching the balance before the deadline rather than after it.

The rate went up on 6 April 2026

The section 455 rate tracks the dividend upper rate, and that rate rose from 33.75% to 35.75% on 6 April 2026. So the charge is now:

35.75% on loans made on or after 6 April 2026
33.75% on loans made between 6 April 2022 and 5 April 2026

The rate is fixed by when the money left the company, not by when the deadline falls, so a loan account built up across both sides of April 2026 can carry two rates at once. That is a bookkeeping problem as much as a tax one, and it is a good reason to have the drawings dated properly rather than reconstructed from memory at the year end.

For completeness, the dividend rates that sit alongside this for 2026-27 are 10.75% at the basic rate, 35.75% at the higher rate and 39.35% at the additional rate, with a £500 dividend allowance.

A worked example

The figures below are illustrative, but the arithmetic is exactly what HMRC would apply.

A company has a 31 March year end. Over the year to 31 March 2027 the director draws £28,000 from the business that is not salary and not declared as a dividend. All of it was drawn after 6 April 2026, so the 35.75% rate applies.

Do nothing. The balance is still £28,000 on 1 January 2028. Section 455 charge: £28,000 × 35.75% = £10,010, payable with the corporation tax.
Repay £12,000 before 1 January 2028. The charge falls on the remaining £16,000: £16,000 × 35.75% = £5,720. Finding £12,000 saved the company £4,290 in tax.
Repay the lot before 1 January 2028. No section 455 charge at all.

That is the corporation tax side. There is a second, separate charge running underneath it, and it is the one people forget.

The benefit in kind, which is the charge you do not get back

If the loan account is overdrawn by more than £10,000 at any point in the tax year, the loan is a taxable benefit for you personally, because the company has lent you money at less than a commercial rate. HMRC measures the shortfall against its official rate of interest, which is 3.75% from 6 April 2026 — unchanged from the 3.75% that applied from 6 April 2025.

Taking the same director: suppose the balance was £6,000 on 6 April 2026 and £28,000 on 5 April 2027. Under HMRC's normal averaging method the benefit is calculated on the average of the opening and closing balances:

Average balance: (£6,000 + £28,000) ÷ 2 = £17,000
Taxable benefit: £17,000 × 3.75% = £637.50
The director's income tax at the higher rate: £637.50 × 40% = £255
The company's Class 1A National Insurance at 15%: £637.50 × 15% = £95.63

Roughly £351 between the two — and unlike the section 455 charge, none of it comes back. The benefit goes on a P11D by 6 July following the end of the tax year, with the Class 1A paid by 22 July if you pay electronically. Employment-related loans are staying on the P11D for now, even as most other benefits move into real-time payroll reporting from 6 April 2027.

The way to avoid it is to have the company charge you interest at 3.75% or more, actually paid. Charge the official rate and there is no benefit to report. Most directors would rather pay the company a few hundred pounds of interest than pay HMRC the tax on a benefit — the interest is also taxable income for the company, but it stays inside the business.

Getting the section 455 tax back

Section 455 is a deposit rather than a permanent cost. Once the loan is repaid, released or written off, the company reclaims it on form L2P, and the claim can be made up to four years from the end of the financial year in which the repayment happened.

The catch is timing, and it is a brutal one. Repay within nine months of the period end and relief is immediate — the charge simply never arises. Repay later than that and relief is deferred until the due date for the accounting period in which the repayment falls. Take our director: if the £28,000 is repaid during the year to 31 March 2028, the £10,010 is not refunded until 1 January 2029. The company has handed HMRC ten thousand pounds and waits a full year to get it back, interest-free.

Why repaying and immediately redrawing does not work

The obvious dodge — clear the account the day before the deadline, take the money straight back out the week after — was closed years ago, and the rules are specific:

If the loan was over £5,000 and you repay it, then take a new loan of £5,000 or more within 30 days either side of that repayment, HMRC matches the two and the section 455 charge stands on the original loan.
If the loan was over £15,000 and there were arrangements in place to redraw when you repaid it, the charge stands regardless of the 30 days.

A genuine repayment out of genuine personal funds is fine. A round trip through your personal account on 28 December is not, and it is exactly the pattern a compliance check looks for.

What happens if the loan is written off

Writing off a director's loan does release the company's section 455 charge, but it is not a free way out. The written-off amount is treated as a distribution and taxed on you personally at dividend rates, and HMRC's position is that National Insurance is due on it as well. For most owner-directors a write-off ends up costing more than simply repaying, so it is worth modelling both before deciding.

The check to do this week

None of this is complicated once you can see the number. The problem is almost always that nobody has looked.

Find the balance today. In FreeAgent or Xero it is a single account on the balance sheet. If it has never been maintained, it is every non-salary, non-dividend withdrawal since your last year end, less anything you have put in.
Write your deadline on the wall. Nine months and one day after your last year end. That is the only date that matters.
Ask whether it crossed £10,000 at any point in the tax year. If it did, there is a P11D and a Class 1A bill unless the company charged you 3.75% interest.
Decide how it clears. A declared dividend if the company has distributable reserves. A bonus through payroll if it does not. Cash from your own funds if neither works. Each has a different tax cost, and the right answer depends on your other income.
Fix the cause. If the balance grew because dividends were never formally declared, sort the dividend paperwork — board minutes and vouchers, dated at the time, not backdated in March.

Where we come in

Keeping a director's loan account clean is not clever tax planning, it is bookkeeping discipline plus somebody watching a date. That is a standard part of how we look after limited company directors: the balance is visible through the year rather than discovered at the year end, the dividend paperwork is done properly at the time, and the nine-month deadline gets flagged while there is still room to act on it. If you are weighing up how to take money out in the first place, our piece on salary versus dividends covers the trade-off, and our tax planning page covers the wider picture.

If you do not know what your director's loan account balance is right now, that is the thing worth fixing this week. Get in touch and we will help you get a clear picture of it before the deadline does it for you.