Directors' Loan Accounts: When and how HMRC can tax outstanding balances

Published: 12/02/2026 By Hannah Duncan

Directors’ Loan Accounts (DLAs) are common in owner-managed and close companies. While they can help with short-term cash flow, overdrawn directors’ loan accounts are a frequent cause of HMRC tax charges and disputes in insolvency. If a director’s loan is not managed correctly, HMRC may tax both the company and the director personally.

What is a Directors’ Loan Account?
A Directors’ Loan Account (DLA) records money taken out of, or paid into, a company by a director that is not salary, dividends, or reimbursed business expenses. If the director owes money to the company, the DLA is overdrawn this is where most tax and insolvency risks arise.

Section 455: Tax on the Company
Under Section 455 of the Corporation Tax Act 2010, if a directors’ loan is still outstanding nine months and one day after the company’s year-end, HMRC can charge the company additional tax.
Key facts:

• Tax rate is currently 33.75% of the outstanding loan
• The tax is paid by the company, not the director
• It is usually refundable when the loan is repaid or properly cleared

Any HMRC interest on late payment is not refundable, so delays can still be costly.

When HMRC taxes the Director personally
HMRC may also tax the director in two main situations:
Beneficial loan
If the loan exceeds £10,000 and little or no interest is charged, a Benefit in Kind can arise. From April 2025, HMRC’s official interest rate is 3.75%. Charging and paying interest at this rate can usually avoid this charge.
Loan written off or released
If a director’s loan is written off, which commonly occurs in insolvency, HMRC will typically treat the amount as a dividend. The director will then be taxed at the applicable dividend rates.

Directors’ Loan Accounts in Insolvency
In liquidation or administration, an overdrawn DLA is treated as a company asset and the insolvency practitioner will typically seek repayment from the director and may consider recovery action where appropriate.
If the loan is formally written off or compromised, the director is likely to face a personal tax charge. Insolvency does not automatically remove HMRC tax exposure.

Anti-Avoidance Rules
HMRC has strict rules to prevent directors from repaying loans temporarily to avoid s455 tax.
For example:

• Repaying just before the nine month deadline and re-borrowing within 30 days may be ignored
• Circular arrangements between connected companies to clear balances may be challenged

Only genuine, permanent repayments are effective in preventing a tax charge.

Key points
Overdrawn Directors’ Loan Accounts are a common trigger for HMRC tax charges and recovery action in insolvency. Both the company and the director can face significant financial consequences if balances are not managed properly.

Regular monitoring, clearing loans within the nine-month deadline, and taking early advice can help reduce the risk of unexpected tax bills and insolvency complications.