You’re running your limited company, business is steady, and you take out money here and there for personal expenses. Then, your accountant tells you that you owe your company money. But in reality, doesn't the company owe you money? Not necessarily.
Welcome to the confusing world of overdrawn director's loan accounts (DLAs). If you've found yourself in this situation, you're not alone. Many business owners accidentally (or sometimes deliberately) end up overdrawn without fully understanding the tax implications. The good is that there are solutions. Let's break down what happens when your DLA goes into the red and, more importantly, how to fix it.
What Happens If a Director's Loan Account Is Overdrawn?
When your director's loan account is overdrawn, it means you've taken more money out of your company than you've put in or been issued as salary or dividends. Your company is a separate legal entity, so this creates a formal debt—you personally owe money to the business.
This isn't necessarily a problem if you repay it quickly. But leave it unresolved, and you could face some serious consequences:
Section 455 Tax: The 9-Month Deadline
Here's where it gets expensive. If your overdrawn balance isn't repaid within nine months and one day after the end of your company's accounting period, your company will be hit with a Section 455 (S455) tax charge. Find out more about S455 here.
This isn't your typical tax—it's more like a hefty deposit. HMRC charges 33.75% of the outstanding loan amount (or 35.75% for loans made on or after April 6, 2026). So if you owe your company £20,000, that's a £6,750 tax bill for the business to pay.
The silver lining? If you eventually repay the loan, HMRC will refund the S455 tax. But don't get too excited—this refund process can take time, and you won't get back any interest HMRC charges while you're waiting.
Beneficial Loan Rules: The £10,000 Threshold
If your overdrawn balance exceeds £10,000 at any point during the tax year (not your accounting year), HMRC treats it as a taxable benefit-in-kind. This triggers two obligations:
- Personal income tax: You'll need to declare the benefit on your Self Assessment tax return. The taxable amount isn't the full loan—it's the interest you should have paid but didn't, calculated using HMRC's official rate (currently 2.25%).
- Class 1A National Insurance: Your company must pay 13.8% National Insurance on the benefit value and report it on a P11D form. To find out how to fill out and submit a P11D form, read here.
Many directors sidestep this by charging themselves interest at the official rate, which gets added to the loan balance and later cleared through dividends.
Increased Personal Risk
An overdrawn DLA isn't just a tax headache—it's a personal liability risk. If your company faces financial difficulties or enters insolvency, that debt becomes an asset that creditors can pursue. An insolvency practitioner can demand repayment, sell the debt, or take legal action to recover it. You could even face director disqualification or bankruptcy if you can't pay.
What Is the 9-Month Rule for Directors' Loans?
The nine-month rule is straightforward but unforgiving. If you don't repay your overdrawn director's loan within nine months and one day after your company's accounting year ends, S455 tax kicks in automatically.
Let's say your company's year-end is December 31, 2025. The clock starts ticking, and you have until October 1, 2026, to clear that balance. Miss the deadline by even a day, and your company owes 33.75% of the outstanding amount to HMRC.
The "Bed and Breakfasting" Trap
Think you can game the system by repaying the loan just before the deadline and then withdrawing it again? Think again. HMRC has anti-avoidance rules to stop this practice, known as "bed and breakfasting."
If you repay more than £5,000 and then withdraw a similar amount within 30 days (before or after the repayment), HMRC will ignore the repayment for tax purposes. The S455 charge still applies. The same goes if you repay more than £15,000 and arrange another withdrawal at the same time.
Bottom line: temporary repayments won't save you from the tax bill.
What Happens If You Can't Pay Back a Director's Loan?
If you're unable to repay your overdrawn DLA, you've got options—but none of them are pain-free.
1. Declare a Dividend
If your company has sufficient retained profits, you can issue yourself a dividend to offset the loan. The dividend gets credited to your DLA, clearing the overdrawn balance. You'll still pay dividend tax on it, but at least you avoid the S455 charge.
Important: Only do this if your company is genuinely profitable. Issuing dividends when the company is insolvent or doesn't have the reserves can land you in serious legal trouble.
2. Pay Yourself a Salary or Bonus
No profits for dividends? You can issue yourself a salary or bonus instead. The net amount (after PAYE and National Insurance) gets credited to your DLA, reducing what you owe. This works even if your company isn't profitable, but be mindful—you'll pay income tax and NI on the salary. Learn how to pay yourself a salary as a company director here.
If your company is heading toward liquidation, paying yourself a salary can protect you from having the full loan called in later. Just make sure everything is properly documented to avoid accusations of misconduct.
3. Claim Unreimbursed Expenses
If you've been paying for business expenses out of your own pocket and haven't claimed them back, now's the time. Travel costs, use of home as office, equipment purchases—these all reduce your DLA balance. Just make sure you've logged them properly in your accounting system.
4. Write Off the Loan
The company can write off your overdrawn loan, but this is the least attractive option. The written-off amount is treated as dividend income for you personally, and you'll also pay the employee's National Insurance on it. Double taxation, essentially.
Plus, if your company enters insolvency within six years of the write-off, an insolvency practitioner can set it aside and still pursue you for repayment.
5. Consider Redundancy Payments
If you have a formal contract of employment with your company, you may be able to claim a redundancy payment of up to £30,000 tax-free when you exit the business. This can offset your DLA balance, but you'll need to prove the contract was in place before any financial difficulties arose.
How Long Can a Director's Loan Be Outstanding?
Technically, there's no time limit on how long a director's loan can remain outstanding. But the longer it sits there, the more problems it creates.
| Timeframe | S455 Tax Application |
| Within the same accounting year | No S455 tax if repaid before year-end |
| Within nine months of the year-end | No S455 tax, but must be declared on the Company Tax Return |
| After nine months | S455 tax applies, and interest accrues until paid |
| At liquidation | The loan becomes a company asset that creditors can pursue |
If your company enters a Members' Voluntary Liquidation (MVL) or Creditors' Voluntary Liquidation (CVL), the insolvency practitioner will demand repayment or negotiate a payment plan. Ignoring this can lead to personal bankruptcy or legal action.
How Debitam Can Help
Managing an overdrawn director's loan account doesn't have to be a nightmare. At Debitam, we specialise in helping business owners like you navigate complex tax situations with confidence.
We can help you:
- Track your DLA balance in real time to avoid surprises at year-end
- Plan repayments strategically to minimise tax liabilities
- File accurate CT600 returns and claim S458 relief when applicable
- Prepare P11D forms if your loan exceeds £10,000
- Ensure payroll compliance if you're offsetting the loan with salary or bonuses
Our dedicated accountants are here to answer your questions and keep you out of trouble with HMRC. Because when it comes to director's loans, prevention is always better than cure.
Get in touch today and let us help you turn that overdrawn balance into a manageable tax strategy.
Key Takeaways
- An overdrawn DLA means you owe your company money—and it can trigger serious tax consequences.
- Repay within nine months and one day of your company's year-end to avoid the 33.75% S455 tax charge.
- If your loan exceeds £10,000, you'll face benefit-in-kind tax and National Insurance obligations.
- "Bed and breakfasting" (repaying and withdrawing within 30 days) won't help you dodge the tax bill.
- Options for clearing the balance include issuing dividends, paying yourself a salary, claiming expenses, or writing off the loan (least favorable).
- Overdrawn DLAs pose personal liability risks, especially if your company enters insolvency.
- Work with a qualified accountant to manage your DLA proactively and avoid unexpected tax bills.
FAQs About Director`s Loan Overdrawn
What happens if my director's loan account is overdrawn?
You owe your company money. If the balance isn't repaid within nine months of your company's year-end, your company pays S455 tax at 33.75%. If it exceeds £10,000, you'll face benefit-in-kind tax obligations.
Can I close a company with an overdrawn director's loan?
Yes, but the outstanding balance must be addressed. Options include repaying the loan, issuing dividends, or entering liquidation processes like MVL or CVL, where insolvency practitioners will pursue repayment.
What is the 30-day rule for overdrawn director's loans?
If you repay more than £5,000 and withdraw a similar amount within 30 days (before or after), HMRC ignores the repayment for tax purposes. The S455 charge still applies.
Can a company write off a director's loan?
Yes, but it's taxed as dividend income for you, plus employee's National Insurance. It's the least tax-efficient option and can be reversed by insolvency practitioners if your company fails within six years.
How do I avoid S455 tax?
Repay the loan within nine months and one day of your company's accounting year-end, or clear it by issuing dividends or salary before the deadline.
What are the risks of an overdrawn DLA in insolvency?
The loan becomes a company asset that creditors can pursue. Insolvency practitioners can demand repayment plans, and failure to comply can lead to bankruptcy or director disqualification.
