Director's Loan Account and Section 455 CTA 2010: A UK director's guide

A director's loan account is the running account between a close company and its director recording the amounts owed between them. It captures any movement of funds outside the standard salary / dividend / expenses framework: cash withdrawals not classified as salary or dividend; personal expenditure paid from company funds; company assets used for personal purposes; loans formally advanced; and amounts the director has put into the company personally.

DLAs can sit in either direction:

• Overdrawn (debit balance) — the director owes the company. This is the position that engages the s.455 charge.
• In credit (credit balance) — the company owes the director. The company can repay whenever cash flow permits, with no tax consequences on the capital repayment. Interest paid by the company to the director is deductible for the company and taxable income for the director.
• Zero balance — no current obligation in either direction.

DLAs typically arise across an accounting year through ordinary business activity: directors drawing on company funds during the year intending to crystallise the position via dividend at year-end; personal expenses paid from company accounts pending reconciliation; cash flow advances between the director and company. Where the year-end position is in debit and not crystallised, the s.455 framework engages.

When the charge applies

Section 455 CTA 2010 applies where a close company makes a loan or advance to a participator (or to an associate of a participator) and the loan is outstanding at the end of the company's corporation tax accounting period. “Participator” is defined in section 454 CTA 2010 — it includes shareholders, directors, and others with an interest in the company's capital or income. “Associate” is defined in section 448 CTA 2010 — it includes spouses, civil partners, lineal ancestors and descendants, and trustees of relevant settlements.

Most owner-managed UK companies are close companies (controlled by five or fewer participators or by directors), so the regime applies broadly. The charge captures loans to:

• Directors who are also shareholders (the typical owner-managed business scenario).
• Family members of directors (a spouse loan can engage s.455 even where the spouse has no formal connection to the company).
• Trusts and partnerships connected to participators.
• Indirect loans through third parties (under section 459 CTA 2010 — see anti-avoidance below).

The rate

The s.455 rate has been linked to the dividend upper rate since FA 2016. The rate is set by reference to the year in which the loan or advance is made, not the year in which the s.455 charge falls due. This means that loans straddling the rate-change date attract different rates: a loan made in March 2026 attracts the 33.75% rate; a loan made in May 2026 attracts the 35.75% rate. Where partial repayments are made and the company has loans at multiple rates, the allocation of the repayment matters — see the section on allocation below.

The 9 months 1 day deadline

The s.455 charge is payable 9 months and 1 day after the end of the accounting period in which the loan was made — the same date as the company's ordinary corporation tax. For a company with a 31 March year-end, the s.455 charge for loans outstanding at 31 March is payable on 1 January of the following year (9 months and 1 day after 31 March).

If the loan is repaid before that date — by direct repayment, by setting off against a credit balance, by declaring a dividend that clears the balance, or by writing off the loan — no s.455 charge is due. The 9 months 1 day window is therefore the critical planning period: the standard owner-managed-company practice is to declare a dividend at year-end clearing the overdrawn DLA so no s.455 charge crystallises.

The 30-day bed-and-breakfasting rule

Section 464ZA(1) CTA 2010 (formerly section 464C, renumbered for payments on or after 30 October 2024) prevents the most common avoidance technique: the director repays the loan just before the 9 months 1 day deadline and re-borrows shortly afterwards. The rule:

• Where £5,000 or more is repaid by the director, AND
• Within 30 days of the repayment, the director re-borrows £5,000 or more from the company,
• The repayment is treated for s.455 purposes as a repayment of the later loan, not the original.

The original loan therefore remains outstanding for s.455 purposes and the charge applies. The rule operates whether the repayment is before or after the year-end. It captures the classic bed-and-breakfasting pattern but is broader — any 30-day window in which both threshold conditions are met engages the rule.

The arrangements rule

Section 464ZA(3) CTA 2010 extends the bed-and-breakfasting protection beyond the 30-day window where: the original loan was £15,000 or more; there were arrangements at the time of repayment for the director to re-borrow £5,000 or more; and the director then re-borrows that £5,000 or more (regardless of how long after the repayment).

HMRC's interpretation of “arrangements” is set out in the Company Taxation Manual at CTM61635 — it captures both formal documented arrangements and informal understandings. The rule means that even a 31-day or longer gap between repayment and re-borrowing does not protect the s.455 position where the original loan was £15,000+ and the re-borrowing was pre-arranged.

Section 464ZA(6) provides a relief: the bed-and-breakfasting rules do not apply where the repayment itself gives rise to an income tax charge on the participator (for example, where a dividend is declared to clear the loan and the participator pays personal income tax on the dividend). This is why dividend-clearance is the standard year-end planning route for overdrawn DLAs in profitable companies.

Indirect loans (section 459 CTA 2010)

Section 459 CTA 2010 extends the s.455 framework to indirect loan arrangements. Where a close company makes a payment or transfer to a third party that has the substance of a loan to a participator, the s.455 charge applies as if the loan had been made directly to the participator. Common scenarios:

• The company advances funds to a third party who then ‘gifts’ or otherwise transfers them to the director.
• The company funds property purchase by a connected entity that benefits the director.
• Routing arrangements designed to break the formal connection between the company's payment and the director's receipt.

Section 459 is intentionally broad and HMRC's practice is to apply it to any arrangement where the substance is a loan to the participator regardless of the formal mechanics.

Where the DLA balance exceeds £10,000 at any point in the tax year, the loan is treated as an employment-related loan and a benefit in kind arises. This is separate from the s.455 charge — it is a personal income tax issue for the director, not a corporation tax issue for the company.

The benefit-in-kind framework:

• Notional interest is calculated at HMRC's official rate of interest applied to the average loan balance over the tax year (or, by election, on a strict day-by-day basis).
• The notional interest is taxable on the director as employment income through the P11D / payrolled benefit framework.
• The company must pay Class 1A NIC on the notional interest amount.
• Where the director pays interest to the company at or above the official rate, no benefit in kind arises.

The benefit-in-kind exposure is often overlooked compared to the more visible s.455 charge but compounds the cost of carrying an overdrawn DLA. For a director with a £50,000 overdrawn balance throughout the year, the BIK calculation can produce £1,000+ of additional personal income tax plus Class 1A NIC for the company.

Repayment mechanics

Repayment of an overdrawn DLA can take several forms:

• Direct cash repayment by the director.
• Set-off against a credit balance the company owes the director (where the director has both debit and credit balances on different accounts, HMRC's position is that liability under s.455 may arise on any one account in isolation — set-off requires careful documentation).
• Declaration of a dividend that clears the overdrawn balance (subject to the company having sufficient distributable reserves).
• Declaration of a bonus or salary that clears the overdrawn balance (subject to available funds and PAYE/NIC being operated on the bonus).
• Write-off of the loan (which itself triggers PAYE/NIC consequences — see below).

The most cost-efficient is typically dividend declaration where the company has sufficient distributable reserves and the director has personal allowance and dividend allowance available. Cash repayment is straightforward but requires the director to have personal funds. Bonus/salary triggers PAYE/NIC. Write-off triggers PAYE/NIC.

The section 458 refund

Section 458 CTA 2010 provides for refund of the s.455 charge once the loan is repaid, released, or written off. Critically, the refund is delayed: it cannot be claimed until 9 months and 1 day after the end of the accounting period in which the repayment or write-off occurred.

Worked example: a loan advanced in the year ended 30 June 2024 is outstanding on 30 June 2025 (s.455 due 1 April 2026). The loan is repaid on 1 July 2025 — within the year ended 30 June 2026. The s.458 refund cannot be claimed until 1 April 2027 — 21 months after the actual repayment. The cash-flow impact is material: the company has paid the s.455 charge in cash but cannot reclaim it for almost two years after the underlying loan has been repaid.

The refund process is not automatic. A separate claim must be made to HMRC's Corporation Tax Services — typically by letter rather than through the company's tax return. The company should retain documentary evidence of the repayment date and method for the refund claim.

Allocation of partial repayments

Where the director makes partial repayments and the company has multiple outstanding loans (potentially at different rates following the 6 April 2026 rate change), the allocation of the repayment matters. The director and company can specify which loan is being repaid — ideally documented contemporaneously by an email or written allocation from the director to the company.

If no formal allocation is made, HMRC applies the “rule in Clayton's case” — repayments are allocated to the oldest outstanding borrowing. This is usually neutral or favourable to the taxpayer, but with the rate change from 6 April 2026 it is no longer always optimal: a director with both pre-2026 and post-2026 loans may want to repay the higher-rate post-2026 loans first to reduce the future s.455 exposure. Active allocation is therefore important from April 2026 onwards.

PAYE and NIC consequences

Writing off an overdrawn DLA — the company formally releasing its claim on the director — looks attractive on the surface: the loan disappears, the s.455 charge becomes refundable, and the matter is resolved. The reality is more expensive.

Where the director is also an employee or office-holder of the company (which is the standard owner-managed business scenario), HMRC treats the loan release as earnings from the employment. The consequences:

• PAYE income tax must be operated on the write-off amount.
• Employer's National Insurance contributions are payable on the write-off amount.
• Employee's National Insurance contributions may also be payable — though the analysis is nuanced and depends on whether the write-off is treated under section 188 ITEPA 2003 (employment-related loans) or as a general earnings receipt.
• The director's personal income tax position reflects the receipt as employment income.

For a write-off of £50,000, the cumulative tax cost (PAYE income tax + employer's NIC + employee's NIC where applicable) can exceed £25,000 — making the write-off materially more expensive than the underlying s.455 charge would have been if the loan had simply remained outstanding.

When write-off makes commercial sense

Write-off can make commercial sense in specific scenarios:

• Where the company is approaching liquidation and the director cannot realistically repay — write-off may be preferable to leaving the loan to be enforced by the liquidator (which produces personal recovery action).
• Where the company has substantial losses to offset the write-off and the director's personal tax position can absorb the income recognition.
• Where the s.455 charge would otherwise be carried for an extended period without realistic repayment prospects.
• Where the director is exiting the company and a clean balance sheet position is needed for transaction or regulatory purposes.

The decision is fact-specific and requires modelling of the cumulative tax cost (PAYE + NIC) against the alternative (s.455 carried forward, eventual repayment, eventual s.458 refund). Specialist tax advice is typically essential before write-off is implemented.

The DLA as a debt due to the company

This is the area where IQ Insolvency adds the most distinctive practitioner perspective. When a company enters formal procedure with an overdrawn DLA, the DLA balance is a debt owed by the director to the company — an asset of the insolvent estate. The company's books show £50,000 (for example) as receivable from the director; the insolvency practitioner has a duty to investigate that receivable and pursue recovery for the benefit of unsecured creditors.

DLAs are one of the more substantial asset categories in many smaller-company insolvencies, particularly where the directors have used the company as a working capital extension over time and the position has not been crystallised. Practitioners often see DLA balances of £50,000–£500,000 in Creditors' Voluntary Liquidation cases for owner-managed businesses.

Recovery by the liquidator

The liquidator's recovery options against the director:

• Demand for repayment — typically a structured payment plan if the director can fund repayment over time.
• Statutory demand for £5,000 or more (the bankruptcy petition threshold) — which can produce voluntary settlement before petition stage.
• Bankruptcy petition where the director cannot pay — producing personal insolvency procedure that captures the director's assets.
• Ordinary debt action through the courts — typically county court judgment with enforcement against assets.
• Set-off against any credit balance the company owes the director (rare in practice but legally available).

Recovery rates vary substantially based on the director's personal financial position. Where the director has personal assets, equity in property, or ongoing employment income, recovery is typically meaningful. Where the director is asset-poor, recovery may be modest — but the personal exposure is real and the procedural protections of corporate limited liability do not apply.

Set-off and equitable adjustments

Several adjustments can affect the recoverable DLA balance in liquidation:

• Director's salary or expense claims that should have been recorded but were not — these can offset the DLA balance.
• Personal funds the director put into the company that were not properly recorded as credit balance — if evidenced, these reduce the receivable.
• Tax adjustments where dividends were declared that the director's personal tax filings did not reflect — the position can become complex with HMRC also engaged.
• Overpayments or duplicate entries in the accounting records.

Where the recorded DLA is not accurate, the liquidator and director engage in a reconciliation exercise. Documentary evidence is critical — directors who can produce contemporaneous records of unrecorded credit-side entries are in a materially stronger position than those relying on retrospective assertions.

Wrongful trading and misfeasance overlap

DLA management often features in wrongful trading and misfeasance analysis in liquidation. Specifically:

• Directors continuing to draw against the DLA after the company became insolvent (s.123 IA 1986 inability to pay) can support a wrongful trading claim under section 214 IA 1986 — the drawings worsened the position of unsecured creditors.
• Increases in the DLA during the period of known insolvency may be unwound under sections 238 (transactions at undervalue) or 239 IA 1986 (preferences) where the drawings can be characterised as preferential.
• DLA balances combined with continued trading despite insolvency can support misfeasance claims under section 212 IA 1986 — particularly where the director's personal benefit (the DLA drawings) materially exceeded the value the company received.

Practitioners typically review DLA movements over the 12-24 months prior to the company entering procedure for these patterns. The combination of DLA recovery, wrongful trading, preferences, and misfeasance produces the cumulative director-personal exposure that is often the principal commercial focus in owner-managed business liquidations.

• Run the DLA actively, not retrospectively. Record movements as they occur, not at year-end. This produces an accurate position throughout the year and avoids retrospective reconstructions that are more vulnerable to challenge.
• Plan the year-end position. By month 9 of the financial year, the director and accountant should have a view on the year-end DLA position and how it will be cleared. Year-end surprise overdrawings are the typical cause of unplanned s.455 charges.
• Use dividends rather than write-offs where possible. Dividend clearance avoids both the s.455 charge and the PAYE/NIC consequences of write-off, provided distributable reserves and personal tax allowances are adequate.
• Document allocations explicitly. With the rate change from 6 April 2026 producing different s.455 rates on different vintages of loans, formal allocation of repayments to specific loan tranches should be documented contemporaneously.
• Review DLA position pre-insolvency. Where formal procedure is becoming likely, the DLA position should be reviewed alongside other director-conduct considerations (wrongful trading, preferences, misfeasance) to inform timing and structuring of any procedure.

If you have an overdrawn DLA approaching the year-end + 9 months deadline, are considering write-off, or are facing the DLA in a company approaching or in formal procedure, the first step is a conversation with a licensed practitioner. The conversation will assess the realistic options — dividend clearance, structured repayment, write-off, formal procedure planning — and the priority steps. The intersection between DLA management and formal procedure is technically dense and the cost of getting it wrong is material. There is no charge for the initial consultation and no obligation arising from it. Confidentiality is absolute.

At IQ Insolvency, every DLA-related engagement is led by a licensed insolvency practitioner from the first conversation. The IP works with the company's tax adviser where the planning crosses into tax advisory territory, and handles the insolvency-specific workstream end-to-end. No call centres. No handoffs. One licensed practitioner, start to finish.

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