Director’s Loans: What They Are, When They Become a Problem, and How to Fix Them

There are a number of ways that directors end up with overdrawn loan accounts. Sometimes it’s intentional and they can be a useful way of managing the extraction of profit from their business, and the way it is taxed.

Sometimes it is not intentional, and worse still we regularly meet directors who have not even realised that this is the situation they are in. The financial implications of this can threaten the company’s very existence. Additionally, if the correct processes are not followed for board and shareholder approval of a loan, it can be considered ‘voidable’ or invalid.

This article sets out what that means, what happens if the balance is not cleared in time, and the genuine options for fixing it.

What Is a Director’s Loan Account, and How Does It Become Overdrawn?

Each director has a running balance with their company, recording money that passes between them. If they put money into the company, the account is in credit. If they take money out that has not been paid to them as salary, reimbursed expenses or voted as a dividend (for those that are also shareholders), the account moves into deficit, and they become a debtor to their own company.

This happens more often than people expect. Common causes include drawing cash through the year ahead of a dividend that is never formally declared, using the business account for personal expenses, or drawing more than the company can support once distributable reserves have been calculated.

Does a Director’s Loan Need Shareholder Approval?

Shareholder approval is a company law requirement, separate from the tax treatment covered above, and it applies once a director’s loans from the company total more than £10,000. Getting this approval means passing an ordinary resolution of the shareholders, given at a general meeting or in writing for private companies, before the loan is made. There are some carve-outs, including loans used to fund company business up to £50,000, and loans to cover the cost of defending certain proceedings, but most loans above the £10,000 threshold need this sign-off regardless of the tax position. If a company skips this step, the loan is voidable at the company’s option, meaning it can be unwound later even if the director assumed it was settled, and the director can be required to account for any gain made and indemnify the company for any resulting loss. This is a real risk for single director-shareholder companies where the paperwork gets treated as a formality, since the approval still needs to exist and be properly recorded, even when the director and the sole shareholder are the same person.

Carolyn says:

When Does an Overdrawn Balance Become a Problem?

There are two major ways that an overdrawn director’s loan account can cause trouble.

The first is when the loan remains overdrawn nine months and one day after the end of the company’s accounting period, the same day their corporation tax is due. If the loan is still outstanding on that date, the company faces a tax charge under section 455 of the Corporation Tax Act 2010, usually just called section 455 tax or S455.

The rate follows the higher rate of dividend tax, and it has recently moved. Loans made before 6 April 2022 are charged at 32.5%, loans made from 6 April 2022 attract 33.75%, and loans made on or after 6 April 2026 attract 35.75%, following the increase to the dividend upper rate announced at the Autumn Budget 2025. Where a running balance has built up across these dates, different parts of it can genuinely carry different rates, and working out which pound was drawn when becomes part of the calculation.

The important thing to understand is that section 455 tax is not a permanent loss. It is closer to a deposit HMRC holds until the loan is put right, and once it is repaid, released or written off, the company can reclaim the tax. But the reclaim is not immediate and not automatic, which is where the real cash flow pain sits.

If I Can’t Repay It in Time, What Happens?

If the balance is still outstanding on the nine months and one day deadline, the company pays the section 455 charge alongside its corporation tax. Nothing stops the director repaying the loan afterwards, but doing so does not get the money back straight away. Relief under section 458 only becomes due nine months and one day after the end of the accounting period in which the repayment happens, and the company must make a formal claim to HMRC rather than relying on it happening automatically. Claims must be made within four years of the end of the relevant accounting period, or the right to reclaim is lost.

What If the Loan Is More Than £10,000?

A second issue kicks in once the outstanding balance goes over £10,000 at any point in the tax year, regardless of whether section 455 applies. HMRC treats an interest free or low interest loan of this size as a benefit in kind. Unless you pay interest to the company at least equal to HMRC’s official rate, currently 3.75%, the difference is taxed on the director personally through a P11D, and the company also pays Class 1A National Insurance on the value of the benefit, currently at 15%.

This runs alongside section 455, not instead of it. A large overdrawn balance can therefore generate three separate costs: the section 455 charge on the company, a benefit in kind charge on the director and Class 1A National Insurance on the company.

Carolyn says:

Can I Just Repay It and Borrow the Money Again Afterwards?

This is one of the most common questions we get, and the honest answer is no, not in the way people hope. HMRC introduced specific anti-avoidance rules, known as the bed and breakfasting rules, precisely to stop directors clearing a loan just before the deadline and quietly redrawing a similar amount shortly after.

There are two versions. Under the 30 day rule, if you repay £5,000 or more and then borrow £5,000 or more again within 30 days, the repayment is matched against the new borrowing rather than the original loan, so the original amount stays exposed to section 455 as though nothing had been repaid. Under the arrangements rule, where the original loan was £15,000 or more, HMRC can apply the same treatment even outside the 30 day window if there was already an intention or arrangement to re-borrow at the time the repayment was made.

There is a genuine and commonly used exception. If the loan account is repaid by crediting it with a salary, bonus or formally declared dividend, something that itself creates an income tax charge on you personally, the bed and breakfasting rules do not apply, and you are free to draw further funds afterwards without falling foul of them. This is why voting a dividend to clear a director-shareholder’s loan is such a well-used route, provided it is done properly and the paperwork exists.

What If the Company Just Writes the Loan Off Instead of Me Repaying It?

Writing off or formally releasing the debt is a legitimate way to deal with it, and it does trigger section 458 relief in the same way repayment does, so any section 455 tax already paid becomes reclaimable on the usual timetable. However, it is not a free option. For a director who is also a shareholder, a written off loan is generally treated as a dividend for tax purposes, so you personally pay income tax on it at dividend rates, and the company gets no corporation tax deduction for the write off. In some circumstances involving a director who is not a shareholder, it can instead be treated as employment income, which brings National Insurance into play as well. Which treatment applies depends on the specific facts, so this is not a decision to make without checking first.

What Is the Best Way to Avoid Getting into This Position in the First Place?

• Keep the loan account reconciled through the year, not just at year end, so you know your running balance rather than discovering it in the accounts.
• Vote dividends formally and promptly when you take money out, with proper board minutes and dividend vouchers, rather than treating drawings as informal advances against a dividend that never gets declared. We’ve prepared this useful infographic to highlight how to do this: Lawful Dividends
• If a balance builds up unavoidably, plan the repayment route well before the nine-month deadline, whether that is a bonus, a dividend, or genuine cash repayment, rather than deciding at the last minute.
• If you do need to borrow from the company on a more formal, ongoing basis, consider a proper loan agreement with interest charged at least at HMRC’s official rate, which avoids the benefit in kind charge entirely.

The Bigger Picture

An overdrawn director’s loan account is rarely a crisis if it is caught early. The problems we see are almost always the ones spotted for the first time when the year-end accounts are being finalised, with the nine-month clock already most of the way through. Once section 455 tax is triggered, the interaction between company cash flow, personal tax, and the timing of any reclaim gets complicated quickly, and the bed and breakfasting rules mean there is no quick fix once the deadline has passed.

If you have taken money out of your company that is not salary or dividends, it is worth getting the numbers modelled properly before the corporation tax deadline rather than after it. Get in touch and we will work through the options with you while there is still time to choose the cheapest one.

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