Director’s Loan Accounts and Section 455 Tax

2 months ago by Oliver Atkinson

Director’s Loan Accounts and Section 455 Tax

For directors of UK Limited companies, the Director’s Loan Account (DLA) can be both a benefit and a pitfall – understanding how it works can stop it getting away from you and help you manage both your business and your personal finances.

What is the Director’s Loan Account?

To understand the DLA, the key point to remember is that a Ltd company is a separate legal entity from the director. That is, the company itself can own assets and property, and must pay its own taxes on any profits. The director can control a company through their shareholding and make decisions on behalf of the company but they themselves are not one and the same. Therefore, a degree of separation is required when it comes to what is the company’s money, and the director’s money, which is where the DLA comes into play.

The DLA represents the money owed to or from the director on the company’s balance sheet. For example, if the company wishes to purchase an asset, but does not have enough money in its bank account to do so, the director can loan his own money into the company to make the purchase. The result is that the company now owes the director the sum transferred.

Likewise, if the director takes a loan out of the company bank account when he is not currently owed anything, he must either declare a dividend representing the funds withdrawn or pay them back to the company within 9 months of the end of the company’s financial year.

However, whilst on a surface level this seems fairly straightforward, there are complexities to consider – for instance, what if the director takes money out of the company account and spends it, but the company does not have enough profit or retained earnings to declare a dividend to cover the withdrawal?

Section 455

Section 455 refers to Section 455 of the 2010 Corporation Tax Act. The act states that if a director’s loan account is overdrawn (that is, the director owes the company money) at the end of the financial year, and the sum is not repaid within 9 months and 1 day, then a temporary corporation tax charge becomes due on the DLA balance.

The tax rate chargeable on this balance is much higher than the standard 25% corporation tax rate and is usually linked to the higher rate for personal tax, currently levied at 35.75%.

So, for instance, if a director were to owe the company £6,000 at the end of the year, if they do not repay this within the allotted time period then the company would be liable for an additional £2,145 corporation tax on top of their regular corporation tax bill.

But as mentioned, this tax charge is temporary – what does that mean exactly? Well, if the director were to pay back the £6,000 to the company after the 9 months and 1 day have passed, then whilst the company would have to pay the additional corporation tax initially the sum would be refunded at the end of the next filing period.

Let’s use our £6,000 DLA overdraft to demonstrate:

• £6,000 is owed to the company by the director at the end of the company’s financial year 31/12/2026 and is not repaid within the 9-month period.
• The company adds the additional £2,145 tax due under Section 455 to its corporation tax bill and makes payment on the due date 1st of October 2027.
• The director then repays the £6,000 the before the end of the next financial year of 31/12/2027
• On the 1st October 2028, the £2,145 is refunded or deducted from the next corporation tax bill as the sum is no longer owing.

From this example we can see that this is a fairly long waiting time for the refund to come through – a whole year from payment to refund – so it’s always best to aim to repay the company before the 9-month period is up, or better yet, ensure that the director does not owe the company any money at the year end.

Interest Charges?

A director’s loan account is generally interest-free up to a certain limit, unless specific provisions are made within the articles of the company to account for interest on monies lent to or from a director.

However, if the director owes the company more than £10,000 at any point during the year and there is no means to declare a dividend against this borrowed amount nor repay it within 9 months of the year end, then interest charges must be applied for the periods for which the balance exceeds £10,000. The current rate of interest charged is 3.75%, so this can stack up quite quickly if you don’t keep on top of it.

Combined with the potential additional tax charges under Section 455, it can make borrowing money from your Ltd company a very expensive proposition.

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