Most limited company directors have a director’s loan account whether they realise it or not. It is simply the running record of money that has moved between you and your company outside of salary, dividends and genuine business expenses. Take £500 out to cover a personal bill, and that is a loan from the company to you.
None of that is a problem in itself. It becomes a problem when the balance is still sitting there nine months after your year end, because that is the point at which the company pays a Corporation Tax charge on it. Here is how it works, and how to stay well clear of it.
What counts as a director’s loan
You have an overdrawn director’s loan account if you owe the company money. The usual routes in are ordinary enough:
- Paying for something personal from the business account, because the business card was the one in your pocket.
- Taking regular drawings through the year and deciding later how much was salary and how much was dividend.
- Declaring a dividend the profits did not actually support, which leaves the difference as a loan.
- Being reimbursed for an expense that turns out not to be an allowable business cost.
The last two are the ones that catch out the most careful people, because they feel like tax planning rather than borrowing.
The nine month deadline
If your loan account is overdrawn at your company’s year end, you have nine months and one day from the end of that accounting period to clear it. Repay it in time and nothing happens.
Miss it, and the company pays a Corporation Tax charge on whatever is still outstanding. This is the charge accountants call section 455, after the piece of legislation it comes from.
If your year end is 31 December 2025, your deadline is 1 October 2026. If it is 31 March 2026, you have until 1 January 2027. Worth a note in the diary, because it lands nine months after the year end rather than at the year end itself, which means it can arrive when nobody is thinking about that period any more.
What the charge costs
The rate tracks the higher rate of dividend tax, so it went up this April along with everything else.
| When the loan was made | Rate of charge |
|---|---|
| Before 6 April 2026 | 33.75 per cent |
| On or after 6 April 2026 | 35.75 per cent |
On a £30,000 loan left outstanding, that is £10,725 of Corporation Tax the company has to find, on top of the tax it already owes on its profits.
The charge is refundable, which is the part that reassures people, and the timing is the part that should not. You do not get the money back when you repay the loan. You get it back nine months and one day after the end of the accounting period in which you repaid it. Repay a loan in June 2027 with a 31 March year end, and the refund is not due until 1 January 2029. The company has been without that cash for well over two years, and HMRC does not pay you for the privilege.
The other charge, on smaller loans
There is a second, quieter cost that applies at a much lower level. If your loan balance goes over £10,000 at any point in the tax year, and the company charges you either no interest or less than HMRC’s official rate, the difference counts as a benefit in kind.
The official rate for the 2026 to 2027 tax year is 3.75 per cent. The company reports the benefit on a P11D and pays Class 1A National Insurance on it at 15 per cent, and it goes on your Self Assessment as well.
You can sidestep this entirely by having the company charge you interest at the official rate and actually paying it. That interest is then income for the company, so it is not free, but it is usually cheaper and tidier than the alternative.
Repaying and re-borrowing does not work
The obvious move, once you understand the nine month rule, is to repay the loan just before the deadline and take it straight back out afterwards. HMRC thought of that some years ago.
Two rules block it. If you repay £5,000 or more and borrow £5,000 or more again within 30 days, the repayment is matched against the new borrowing rather than the old loan, so the original balance is treated as never having been cleared. And where the loan is £15,000 or more, the 30 day gap does not save you either: if there was an arrangement or intention to re-borrow when you made the repayment, the same matching applies whenever the new loan is taken.
The practical version is simple. A repayment only counts if it is a real repayment.
Writing it off is not an exit
Directors sometimes ask whether the company can simply write the loan off. It can, but the amount written off is then treated as income in your hands, taxed broadly as a dividend, and there can be National Insurance consequences too. The money does not escape tax, it just changes which tax it pays.
How to keep it a non-issue
None of this is difficult to avoid. It mostly comes down to habits.
- Keep personal spending out of the business account. Every personal purchase on the company card is a bookkeeping job and a small addition to your loan balance. A separate card costs nothing.
- Declare dividends properly, and only out of profit. A dividend needs distributable reserves behind it and paperwork in place. Taking money first and labelling it later is what turns drawings into a loan.
- Look at the balance before the year end, not after. Nine months sounds generous, and it is, but the decision about how to clear the balance is much easier while you can still declare a dividend or adjust your salary for the year.
- Watch the £10,000 line. If you are anywhere near it, the benefit in kind question needs answering, and charging interest is often the neatest fix.
We keep an eye on this for you
Directors’ loan accounts are one of the things we check through the year rather than discovering at the year end, when the options have narrowed. We tell clients where the balance stands, what it will cost if it stays there, and the cheapest way to clear it, alongside the accounts, the Corporation Tax return, the payroll and the filing dates.
Ltd Company Starter is from £105 per month, and Growing Strong, for companies wanting more planning through the year, is from £205 per month. Both are fixed fees, with no charge for picking up the phone.
If you would rather someone else watched the nine month clock, Get your instant quote and see your fixed monthly fee in under a minute.