Director's loan account explained for 2026/27

The Director's Loan Account (DLA) is one of those concepts that sounds simple — a record of money flowing between you and your company — but creates real tax complications when it goes into debit. With the April 2026 dividend rate rise making extraction more expensive, some contractors look at the DLA as a way to access company cash without immediately paying dividend tax. This guide explains how the DLA works, the s.455 tax charge that applies to overdrawn accounts, and why post-2026 dividend rates make most DLA strategies less attractive than they appear.

What a Director's Loan Account is

The Director's Loan Account is a ledger in your company's accounts that records every financial transaction between you (as director) and the company that is not salary, dividend, or expense reimbursement. It is a running balance.

When the company owes you money (credit DLA): If you put money into the company (a director's loan to the company), lend the company cash, or pay company expenses from personal funds that are not yet reimbursed, the DLA is in credit. The company owes you that balance. You can withdraw it at any time with no tax consequence — you are just being repaid money you lent.

When you owe the company money (debit/overdrawn DLA): If you take money from the company beyond your declared salary and dividends — for example, drawing cash from the company account for personal use before a dividend is formally declared — you owe the company that money. The DLA is overdrawn. This is where the tax rules bite.

Why overdrawn DLAs occur

The most common scenarios:

1. Advance draws: You take cash from the company account before the accountant has formally declared a dividend. The money comes out as a DLA debit pending dividend declaration.

2. Informal cash access: Especially in early years of trading, some directors treat the company account loosely, taking money whenever needed and intending to reconcile at year-end.

3. Deliberate strategy: Borrowing from the company at a favourable rate, intending to repay before the s.455 deadline.

4. Accidental overpayment: Taking more in dividends than the company had sufficient distributable profit to support — technically making those drawings a DLA debit rather than a legitimate dividend.

The tax-free informal loan: the £10,000 threshold

If the total overdrawn DLA balance does not exceed £10,000 at any point in the tax year, and the director is also a shareholder, HMRC treats this as a small loan. Provided the company is solvent and the loan is genuinely temporary, there is no benefit-in-kind tax charge on the interest foregone — the director does not have to pay income tax on the notional interest they have not paid the company.

Above £10,000, the company should either:

• Charge market-rate interest on the loan (currently defined by HMRC as the official rate, typically 2.25%/year)
• Or the director pays income tax on the benefit-in-kind value of the interest foregone (reported on form P11D or via payroll)

The £10,000 threshold applies to the peak outstanding balance during the tax year, not the year-end balance. If the DLA reaches £12,000 at any point, the benefit-in-kind calculation applies to the full amount above £10,000 for the period it was above threshold.

The s.455 Corporation Tax charge

Here is the serious tax consequence of an overdrawn DLA: Section 455 CTA 2010.

If a director's loan account is still overdrawn 9 months and 1 day after the company's accounting year-end, the company pays a s.455 tax charge equal to 33.75% of the outstanding overdrawn balance.

The key points:

• It is a deposit, not a permanent charge. When the DLA is repaid (the director pays the money back to the company, or a dividend is declared offsetting the balance), the company can reclaim the s.455 tax paid. It is refundable — but the refund takes 9 months from the end of the accounting year in which repayment was made.

• The rate mirrors higher-rate dividend tax. The 33.75% rate was set in 2022 to match the then higher-rate dividend tax rate. After the April 2026 dividend rise, higher-rate dividend tax is now 35.75% — so the s.455 rate of 33.75% is slightly below the equivalent dividend tax. HMRC may eventually raise it to match; some advisors anticipate a future rise to 35.75%.

• The 9-month window is the company year-end, not the tax year. If your company year-end is 31 March, the s.455 payment is due by 1 January. If your year-end is 31 December, it's due by 1 October.

• Partial repayment counts. If you repay £10,000 of a £30,000 overdrawn DLA before the 9-month deadline, s.455 is only charged on the remaining £20,000.

Worked example: £30,000 overdrawn DLA

Your company year-end is 31 March 2026. On 1 April 2026, your DLA is overdrawn by £30,000.

You do not repay by 1 January 2027 (9 months after year-end).

S.455 charge = £30,000 × 33.75% = £10,125

The company writes a cheque for £10,125 to HMRC. This is paid out of company funds.

Later, in the tax year ending 31 March 2027, you declare a dividend of £30,000 which offsets the DLA debit. In the January 2028 self-assessment, the company claims back the £10,125 s.455 deposit.

The cost in the interim: £10,125 tied up with HMRC, earning nothing, for approximately 12–15 months. At 5% opportunity cost, that's approximately £500–£600 in foregone investment return. Not catastrophic — but entirely avoidable.

You also owe dividend tax on the £30,000 dividend you used to clear the DLA. At higher-rate dividend tax (35.75%): £30,000 × 35.75% = £10,725 in personal tax.

Total extraction cost of the £30,000 via DLA + dividend: £10,725 in dividend tax + £10,125 in s.455 (refundable) = effectively the same as just declaring the dividend in the first place, but with cash flow complexity and HMRC's temporary possession of £10,125.

The "bed and breakfast" rule — 30-day repayment

HMRC anticipated directors gaming the s.455 rule by repaying the DLA just before the 9-month deadline and re-borrowing shortly after. The bed and breakfast anti-avoidance rule applies:

• If you repay a DLA of more than £5,000, and then re-borrow from the company within 30 days, the repayment is ignored for s.455 purposes — the original loan is treated as still outstanding.

This prevents "churning" the DLA to repeatedly claim s.455 refunds while maintaining permanent borrowing from the company.

The DLA and the new dividend tax rates

Post-April 2026, higher-rate dividend tax is 35.75%. The s.455 rate is 33.75%. This narrow gap (2 percentage points) means the DLA is slightly cheaper than a dividend for higher-rate taxpayers — but only as a timing tool.

In practice, using the DLA as a permanent tax avoidance strategy does not work:

• The DLA must eventually be cleared (by dividend, repayment, or write-off — each with its own tax consequences)
• Write-off is taxed as employment income (not dividend), so worse: income tax + NI
• The s.455 deposit is refundable but not costless (cash flow, admin, HMRC relationship)

Better strategies for accessing company cash in 2026/27:

1. Declare dividends correctly and on time. A board resolution and dividend voucher formalises the dividend; it comes out as personal income taxed at dividend rates. Clean, simple, and no s.455 risk.

2. Time dividends against your tax year. If you are a higher-rate taxpayer in one year but expect a quieter year next year, deferring a dividend into the lower-rate year saves tax.

3. Use a beneficial loan within £10,000. If you need a short-term advance (bridging while waiting for invoice payment, for example), keeping it under £10,000 and within the company year-end avoids all s.455 and benefit-in-kind issues.

4. Employer pension contributions. If the underlying need is long-term wealth accumulation rather than current spending, pension contributions are more tax-efficient than extraction in any form.

5. Repay before the 9-month deadline. If you do end up with an overdrawn DLA, setting a calendar reminder for 9 months after year-end and clearing the balance before then costs nothing (other than temporarily putting personal cash back into the company, which clears the debit).

Accountant territory

The Director's Loan Account intersects with corporation tax (s.455), income tax (benefit in kind on large loans), employment law (write-off treated as emoluments), and company law (directors cannot take money from an insolvent company without legal consequences). The rules are not especially complex individually, but they interact in non-obvious ways.

If you have an overdrawn DLA above £10,000, or are using the DLA to time extractions across year-ends, this is genuinely accountant territory. A contractor accountant familiar with Limited Company directors (not just sole traders) should review your DLA position annually.

HMRC source

The s.455 charge on directors' loans is documented at gov.uk — Expenses and benefits: loans provided to employees. The official interest rate for beneficial loans is published at gov.uk — Beneficial loan arrangements: HMRC official rates.

Summary

The Director's Loan Account records money flowing between you and your company that isn't salary or dividend. An overdrawn DLA (where you owe the company money) triggers a s.455 corporation tax charge of 33.75% if not cleared within 9 months of the company year-end — though this is refundable on repayment. Below £10,000, short-term loans avoid benefit-in-kind charges. Post-April 2026 dividend rates (35.75% higher rate) make the DLA marginally cheaper than a dividend as a timing tool, but not as a long-term strategy. Most contractors should simply declare dividends correctly via board resolution rather than relying on DLA mechanics. Consult your accountant before any DLA balance goes over £10,000 or approaches the 9-month deadline.