Director's Loan Account: s455, BIK & the 9-Month Rule

Director's loan: s455, BIK, and the 9-month rule

An overdrawn director's loan account (DLA) is one of the most common mistakes UK Ltd directors make — and one of the most expensive when ignored. This page covers the three things that matter: the s455 charge, the Benefit-in-Kind position, and the 9-month-and-1-day repayment window.

By Hannah Pike, ACCA · Last reviewed 20 May 2026

At a glance

DLA is overdrawn when YOU owe the company money — the opposite of being a creditor of your own business.

If the DLA is still overdrawn 9 months and 1 day after the company's year-end, HMRC charge the company s455 tax at 35.75% of the balance — refundable when the loan is cleared, but it's a real cashflow hit.

If the average balance during the tax year exceeds £10,000, there's also a Benefit-in-Kind charge (income tax for you, NI for the company) on the difference between HMRC's official interest rate and any interest you actually paid.

Common fixes: declare a dividend large enough to clear the loan, repay personally, or treat as a bonus (with PAYE consequences) — pick based on your wider extraction strategy.

What "overdrawn" means in practice

Your director's loan account is the running balance between you and the company. When the company pays for things on your behalf, lends you money, or you take a 'salary advance' that isn't actually salary, it goes IN your DLA. When you repay or declare dividends that clear the balance, it comes OUT. Overdrawn = the company is owed money by you.

FreeAgent (and Xero) hold the DLA as a category on the balance sheet — typically under 'Equity' or 'Current Liabilities' depending on the direction. A negative balance from the company's perspective = you owe the company.

s455: the 35.75% trap

Section 455 of the Corporation Tax Act 2010 says: if a 'close company' (which most owner-managed Ltds are) lends money to a participator (director-shareholder) and the loan isn't repaid within 9 months and 1 day of the company's year-end, the company pays a tax charge of 35.75% of the outstanding balance on loans made on or after 6 April 2026, or 33.75% on loans made between 6 April 2022 and 5 April 2026.

Worked example: year-end 31 March 2026, DLA balance £20,000 still owed on 1 January 2027. s455 charge: £6,750. Paid with Corporation Tax. Refunded after the loan is cleared in a later period.

Benefit-in-Kind: the £10,000 threshold

If the average DLA balance during the tax year (6 April to 5 April) exceeds £10,000 and you haven't paid the company interest at HMRC's official rate (currently 2.25%), HMRC treats the underpaid interest as a Benefit-in-Kind. You pay income tax on it; the company pays Class 1A NI.

Practical implication: if you're going to dip into the company for short-term cashflow above £10k, either keep it under the threshold or charge yourself interest at the official rate. Charging interest also creates a CT-deductible expense for the company.

The three exit routes

Declare a dividend large enough to clear the balance. Net amount comes off the DLA; gross amount is dividend income for you, taxed at 10.75% / 35.75% / 39.35% depending on band. Cleanest if you have distributable reserves.
Repay from personal funds. Simplest. No tax consequence. The cash just moves from your personal account to the company's.
Vote a bonus (treat as salary). PAYE applies — income tax + employee NI + employer NI. Usually the worst option financially, but sometimes needed when there are no distributable reserves and personal cash is tight.

How the practice health check applies this rule

The DLA trace requires us to find the right account on your balance sheet — there's some FreeAgent variation in naming (Director's Loan Account, Director's Current Account, Owner's Drawings). The current MVP issues a conservative 'needs human review' finding inviting you to bring the DLA to the consultation call. The full automated trace lands in the next engine version.