Here is a question we get most weeks. “I took some money out of the business. Is that a problem?” The honest answer: it depends on what you took, how much, and when you put it back. The director’s loan account is one of the most misunderstood corners of running a small limited company. Mishandled, it triggers a tax charge that catches thousands of UK directors every year. The rules are not complicated, but they are unforgiving.
What Counts as a Director’s Loan
Anything you take out of the company that is not salary, dividend or expense reimbursement adds to your loan balance. Buying personal items on the company card. Drawing cash advances against a future dividend that has not been voted yet. Paying personal bills from the business account. All of it counts. Equally, money you put into the company creates a credit balance you can draw back tax-free later.
The £10,000 Beneficial Loan Threshold
If the loan balance exceeds £10,000 at any point in the tax year, HMRC treats it as a benefit in kind and charges you personally on the deemed interest calculated at HMRC’s Official Rate of Interest. The rate was increased significantly in April 2025 to bring it closer to market lending rates, and HMRC now reviews it on a quarterly basis rather than fixing it for the whole tax year. The current rate published on gov.uk should be checked each time the loan is reviewed, not assumed from a previous year. Loans under £10,000 do not trigger this charge, which is why a lot of directors deliberately keep their balance just below the threshold.
How Section 455 Tax Actually Works
If a director’s loan is still outstanding nine months and one day after the end of your company’s accounting period, the company pays Section 455 tax on the outstanding balance. The rate is linked to the higher dividend rate, which means 35.75% on loans made on or after 6 April 2026 (loans drawn before that date keep the old 33.75% rate). The Section 455 charge is technically refundable. The company gets the money back nine months after the end of the accounting period in which the loan is repaid. In other words, the cash sits with HMRC for at least 21 months and sometimes much longer. It is not a penalty, but it is a serious cash flow hit on a balance you might have thought of as harmless.
Bed and Breakfasting: HMRC Already Closed This One
The classic dodge was to repay the loan just before the nine-month deadline and then take the money straight back out again. HMRC closed the loophole years ago. If you repay £5,000 or more and then re-borrow it within 30 days, the repayment is ignored for Section 455 purposes. Larger arrangements that achieve the same effect can be caught by wider anti-avoidance rules even outside the 30-day window.
Three Clean Ways to Clear the Loan
There are really only three clean exits.
One: repay the loan from personal funds.
Two: vote a dividend equal to the loan balance, which clears the loan but creates a personal tax charge on the dividend.
Three: take a bonus through PAYE, which clears the loan but creates income tax and NI charges. Each route has a different total tax cost. A specialist accountant models the options against your actual income for the year and recommends the cheapest.
Speak to a Business Strategy Accountant Today
The simplest answer is not to build up a loan in the first place. Take a regular dividend monthly or quarterly. Keep personal and company spending genuinely separate. Review the loan account balance every month, not once a year when the accounts are being prepared. A specialist limited company accountant sets up reporting that flags the balance before it becomes a Section 455 problem.
