Tax Planning for High-Earning Company Directors
A director withdraws £30,000 from the company over the year. No dishonesty, no secret. A few holiday payments, some home improvements, a handful of transfers made when personal cash ran low. Nobody writes any of it down. Nine months after the year-end, the company owes HMRC £10,725, and the director is wondering how a series of small, ordinary decisions turned into a very large bill.
That's the director's loan account in a nutshell. It's quiet, it's easy to ignore, and it catches out more owner-managed businesses than almost anything else I see. I've spent years helping directors across Tunbridge Wells, Tonbridge, Sevenoaks and the wider South East untangle these accounts, and the pattern is remarkably consistent. The problem is rarely one big decision. It's a lot of little ones, made without realising they were adding up.
The good news is that a director's loan account is entirely manageable once you understand how it works. So let's go through what it is, when it turns into a problem, what the tax consequences are, how to repay it, and the mistakes I'd most like you to avoid.
A limited company is a separate legal person. Its money belongs to the company, not to you, even if you own every share and you're the only director. When you take money out that isn't salary, a properly declared dividend or an expense repayment, the law treats it as a loan from the company to you. When you put your own money into the company, it's treated as a loan from you to the company.
The director's loan account, often shortened to DLA, is simply the running record of all of those movements. Think of it as a private tab between you and your company. Every time money moves one way or the other, the balance changes.
There are two possible states. If the company owes you money, your account is in credit. You've put in more than you've taken out. If you owe the company money, the account is overdrawn. You've taken out more than you've put in.
An account in credit is generally harmless. An overdrawn one is where the tax rules begin to bite, and we'll come to those shortly. I'd encourage you to keep the distinction clear in your own mind, because I regularly meet directors who assume that any withdrawal from the business is a harmless "loan" simply because it feels like their money. It isn't, unless it falls into one of the proper categories.
Here's something that surprises people. Almost every director has a director's loan account, even if they've never heard the term. It exists automatically in your company's accounting records. Every personal expense paid from the business bank account, and every business cost you pay for personally and haven't been reimbursed for, lands in it.
A client near Paddock Wood once told me he'd "never borrowed anything from the company." We opened the ledger together. It showed over a hundred personal card payments across the year, a few thousand pounds of home-office improvements, and several transfers to his own account. None of it was malicious. All of it was a loan.
Money flows the other way too, and it's often the better side of the story. Many directors lend their company money when they start up, paying for equipment, software or stock from their own pocket, or putting in a cash injection to get through a quiet patch. That creates a credit balance, which the company owes back to you.
The helpful part is that the company can repay it to you tax-free, up to the amount you actually lent. It isn't income, so there's no income tax, no National Insurance and no dividend tax. I worked with a consultant near Sevenoaks who put £25,000 into his company in its first year. Two years later, when the business was comfortably profitable, he drew that money back out without a penny of personal tax. For a young company, that's a very useful source of flexible funding.
You should be able to find out your balance at any time. If your company uses cloud accounting software, it will usually appear as a liability or asset account named something like "Director's Loan". If you're not sure, ask your accountant. It's a ten-second question and it can save you a great deal of trouble later.
The point that matters most is the end of your company's accounting year. If your account is overdrawn on that date, and the balance isn't cleared within nine months and one day, the company has a tax problem. That's the date HMRC uses to decide whether a section 455 charge applies. A balance that is overdrawn mid-year but cleared before the year-end is generally no issue for that charge.
This is why timing matters so much. Two directors can withdraw exactly the same amount over a year. The one who clears the balance in time pays nothing. The one who doesn't pays a substantial tax charge.
The section 455 charge applies to what the rules call a "close company", which is, broadly, a company controlled by five or fewer shareholders or by its directors. That description covers the great majority of owner-managed businesses across Kent. It applies to loans made to a "participator", which in practice means a shareholder, and often covers connected people too, such as a spouse.
A director who owns no shares isn't automatically caught, but in most small companies, the director and the shareholder are the same person. I'd treat the rules as applying to you unless your accountant says otherwise.
There are two separate £10,000 rules, and mixing them up causes endless confusion. First, under company law, loans to directors above £10,000 generally need the approval of the company's shareholders. Second, for personal tax, an interest-free loan above £10,000 at any point in the tax year can create a taxable benefit.
What people often assume, wrongly, is that a loan below £10,000 escapes the section 455 charge as well. It doesn't. The section 455 charge has no £10,000 exemption. A loan of £8,000 still triggers the charge if it remains outstanding past the deadline.
If your company lends you more than £10,000, you normally need shareholders to approve it formally. In a company where you're the sole shareholder, that sounds like a formality, and in a sense it is. But it still needs doing and recording. If there are other shareholders, such as a business partner or a family member, their agreement matters, and they have a legitimate interest in knowing how company money is being used.
I raise this carefully, because nobody likes to think about it. If a company becomes insolvent, a liquidator will look at the director's loan account. An overdrawn balance is an asset of the company, and the liquidator is entitled to pursue it. A director who owes the company £40,000 can be asked to repay it, regardless of what else is going on. It's one more reason to avoid letting the account drift into a large overdraft.
Some directors discover the nine-month deadline and decide to repay the loan just before it, then borrow the money out again straight afterwards. HMRC anticipated this long ago. If you repay a loan and take out a new one within 30 days, the repayment is matched against the new loan, so you don't get relief. There's also an "arrangements" rule that can apply to larger sums, where the repayment is made with the intention of withdrawing the money again later.
I met a restaurant owner in Tunbridge Wells who repaid £20,000 on the last permitted day, then withdrew £18,000 the following week to pay for a house deposit. It felt like a sensible solution. It wasn't. The charge applied just the same.
If a loan to a participator remains outstanding nine months and one day after the company's year-end, the company must pay section 455 tax. For loans made on or after 6 April 2026, the rate is 35.75%. For loans made before that date, it's 33.75%. The rate matches the upper rate of dividend tax, which is deliberate. It's designed to remove any advantage from borrowing instead of paying yourself a taxable dividend.
Here's how it works in numbers. If a loan made in summer 2026 stands at £30,000 at the deadline, the charge is £10,725. For a company with a 31 March year-end, the loan balance at 31 March 2027 would be tested, and any unpaid amount would be due by 1 January 2028. That date is the same as the Corporation Tax payment deadline for that period, which keeps things neat.
This is the part I most want you to remember. Section 455 tax isn't a fine. The company can claim the money back once the loan has been repaid, released or written off. It simply sits with HMRC in the meantime. The cash-flow cost can still be painful, because the refund doesn't arrive immediately. It becomes repayable nine months and one day after the end of the accounting period in which the loan was cleared, and the claim itself must be made within four years.
I've seen small companies short of cash pay a five-figure section 455 charge and wait close to a year for the refund. That's not a disaster, but it's an avoidable strain.
There's a second, separate tax. If your company lends you more than £10,000 at any point in the tax year, and charges you less than the official rate of interest, HMRC treats the difference as a taxable benefit. The official rate is set by HMRC and, since 2025, is reviewed every quarter. It's been in the region of 3.75%, so do check the current figure.
Take a £30,000 loan with no interest charged. At 3.75%, the benefit is £1,125. If you're a higher rate taxpayer, you'd pay £450 in income tax on that benefit. The company would also pay Class 1A National Insurance of 15% on it, which is £168.75. The benefit is reported on a form P11D, and the Class 1A is due by 22 July after the end of the tax year.
None of these figures are enormous on their own. But they're an additional layer of cost and paperwork that many directors don't know about until their accountant mentions it.
One alternative is for the company to charge you interest at the official rate. That removes the benefit in kind altogether. The interest is income of the company and is taxed as part of its profits, and you pay it from your own pocket. For larger loans that stay outstanding for a long time, it's often neater than leaving the benefit to accumulate.
Sometimes a company decides not to ask for the money back. It's allowed, but it isn't free. If the company releases or writes off a loan to a shareholder, the amount is generally treated as if you'd received a dividend, so you pay personal tax on it at dividend rates. The company doesn't get a Corporation Tax deduction for it. The section 455 charge can be reclaimed, but the personal tax on the written-off sum still arrives.
A credit balance is a much simpler picture. Repayments of money you've lent aren't taxable. If the company pays you interest on your loan, however, it generally has to deduct 20% income tax and report it to HMRC, and you'd declare the interest on your own return. Depending on your income, your personal savings allowance may cover some or all of it.
Director's loans also need to be shown in the company's accounts. Even small companies must disclose advances and credits to directors in the notes. And if you owe the company money at the year-end, a supplementary page on the Corporation Tax return, known as CT600A, records the details. This isn't optional. It's one reason the balance can't simply be ignored.
Quick answer: A director's loan account records money moving between you and your company outside salary, dividends and expense claims. If you owe the company money at the year-end and haven't cleared it within nine months and one day, the company pays section 455 tax at 35.75% on loans made from 6 April 2026. The tax is refundable once the loan is repaid, but the cost and the delay are real.
What this means for a company director: You can't treat the business bank account like your own. Every pound that leaves for personal use needs a proper label: salary, dividend, expense repayment or loan. If it's a loan, you need to know the balance, know the deadline and have a plan to repay or regularise it. A credit balance, by contrast, is a helpful tax-free funding source, so it's worth recording what you put in as carefully as what you take out.
Example: A director's company has a 31 March year-end. Between June 2026 and March 2027, the director draws £30,000 more than they've put in. By 31 March 2027, the account is overdrawn by £30,000. If it isn't cleared by 1 January 2028, the company must pay £10,725 of section 455 tax. If the balance is cleared in, say, December 2027, there's no charge at all. In either case, if the loan was interest-free and above £10,000, a taxable benefit and Class 1A National Insurance would apply as well. The same withdrawal, handled differently, can cost nothing or well over £10,000.
Common mistakes: Letting the balance build up unnoticed; assuming a loan under £10,000 avoids section 455 tax; repaying and redrawing within 30 days; paying a dividend without enough profits to support it; and finding out the position only when the accounts are prepared. I cover these in more detail below.
When should you speak to an accountant? As soon as your account is overdrawn by more than a few thousand pounds, before the year-end, and certainly well before the nine-month deadline. The earlier the conversation, the more options you have.
The simplest approach is to pay the money back from your own bank account into the company's. If you have savings, an inheritance or the proceeds from selling an asset, this is straightforward and creates no further tax. The company records the repayment, the balance reduces, and the section 455 liability falls away. It's usually the cleanest answer when you have the cash.
Many directors don't have spare personal cash, so they ask the company to declare a dividend and use it to settle what they owe. The dividend is credited to the loan account rather than paid out, which reduces the debt. It's neat and efficient, provided that the company has enough distributable profits, that the paperwork is done properly, and that you can afford the personal tax.
Dividends currently carry tax at 10.75% in the basic rate band, 35.75% in the higher rate band and 39.35% in the additional rate band, with a £500 allowance. As an illustration, if your salary is £12,570 and you've taken no other dividends this year, a £20,000 dividend would leave £19,500 taxable at 10.75%, which is about £2,096. The same dividend taken when you already have other dividends and a higher income could cost far more. That's why the choice of tax year and the existing balance matter so much, and why it helps to read our guide on salary versus dividends alongside this one.
You can also clear a balance by paying a bonus through payroll. The company deducts PAYE and National Insurance, and the net amount is credited against the loan. The bonus is deductible for Corporation Tax, which is helpful, but it brings both income tax and National Insurance, including employer's NI at 15% above the secondary threshold. For most directors with ordinary profits, a dividend is cheaper. For some, particularly where the company lacks the retained profits for a dividend, a bonus may be the only route.
In practice, the best answer is often a mix. A director might repay £5,000 from savings, clear £10,000 with a dividend that fits within the basic rate band, and deal with the rest through a bonus or a repayment spread across the next tax year. Each option has a different price, and the lowest overall cost depends on your income, your company's profits and your timing. This is a place where a short planning session usually pays for itself.
The date to remember is nine months and one day after the year-end. Repay before then, and no section 455 charge arises at all. Repay after, and the company pays the tax first, then reclaims it. Put the date in your diary, and the date three months before it as your reminder to review the balance.
If section 455 tax has been paid and you later repay the loan, the company reclaims it by making a claim to HMRC. The refund is not automatic, and the claim must be made in time. We handle this routinely for our clients, but if you're managing your own affairs, make a note of the repayment date and the four-year limit.
Whichever route you choose, document it. Board minutes, dividend vouchers, payroll records and bank statements should all line up. A repayment that can't be evidenced is hard to defend if HMRC asks.
It's the most common error by far, and it usually isn't deliberate. A director pays for groceries with the business card because it was in their pocket. A family holiday goes on the company account "to be sorted out later". Each payment is small. Over a year, they become a balance of thousands.
When nothing is written down, the accountant has to reconstruct the year from bank statements, and the director may not remember what each payment was for. I once spent an afternoon with a Crowborough builder going through six months of unexplained transfers. By the end we'd identified most of them, but there was still around £4,000 neither of us could place, and it had to be treated as a loan.
Directors regularly tell me, "It's under £10,000, so it doesn't matter." For section 455, it does. The charge applies to any amount outstanding at the deadline, large or small.
The accounts are often not finalised until close to the filing deadline, which can be nine months after the year-end. So the first time a director discovers an overdrawn balance can be the same month the tax falls due. By then, the options are limited. This is why reviewing the account mid-year, and again a couple of months before the year-end, is far more effective than a post-mortem.
Repaying the loan on one day and taking the money out again days later doesn't work. The 30-day rule and the arrangements rule exist precisely to prevent it. If you need the cash again, the right route is a dividend or salary, not a revolving loan.
It's tempting to declare a dividend to clear an overdrawn account without checking whether the company has the distributable reserves. If it doesn't, the dividend is unlawful, and it can be recovered later. In effect, you've turned a loan problem into a bigger legal one.
Many directors know about section 455 and nothing about the P11D. Missing the benefit-in-kind reporting leaves a gap that can later produce penalties and interest.
Possibly the simplest mistake to avoid. If your accountant doesn't know you've taken a large amount from the company, they can't plan around it. A quick message saying "I've taken £15,000 this year, what should I do?" will always be welcome, and it's much cheaper than the alternative.
Good habits protect you better than any clever planning. These are the ones I'd suggest to every director I work with.
None of this takes long. Most of my clients who adopt it never have a nasty surprise at all.
Director's loan accounts are one of those areas where a small amount of attention makes an enormous difference. At Peter Hodgson & Co, we help limited company directors across Tunbridge Wells, Tonbridge, Sevenoaks and the wider South East keep their accounts in order, plan repayments sensibly and avoid unnecessary tax. If your balance is overdrawn, you're not sure where you stand or you'd simply like a second opinion before your year-end, we'd be glad to talk it through.
Getting in touch is easy. You can complete the "Contact Us" form on our website, call us on 01892 515 733, or send us an email at info@peterhodgson.co.uk.
Disclaimer:
The content of this blog is for general informational purposes only and should not be considered professional tax advice. The information is correct at the time of publishing but may change following future UK budget announcements or updates to HMRC guidance. Individual circumstances vary, and tax obligations can differ based on your personal situation. We strongly recommend consulting with us or a qualified tax professional to receive advice tailored to your specific needs.
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