Director's Loans Explained: S455 Tax and the £10,000 Rule

If you run your own limited company, your director's loan account is one of the most useful and most misunderstood records in your books. It quietly tracks every pound that flows between you and your company outside of salary, dividends and legitimate expenses. Get it right and it gives you flexibility; get it wrong and you can trigger an extra tax charge of more than a third of the balance. This guide explains, in plain English, how the director's loan account works, when tax bites, and how it stacks up against simply paying yourself a salary or a dividend.

What is a director's loan account?

A director's loan account (often shortened to DLA) is simply a running tally of money owed between you and your company that isn't salary, a dividend, or repayment of money you've personally spent on the business. Because your limited company is a separate legal person, every time you take money out that doesn't fall into one of those normal categories, you are in effect borrowing it. Equally, when you put your own money in, the company owes you.

The account has two possible states:

• In credit: the company owes you money. This happens when you lend the business funds, pay for company costs out of your own pocket, or leave declared dividends and salary undrawn. There is no tax consequence to being in credit, and the company can repay you tax-free at any time.
• Overdrawn: you owe the company money. This is the situation that attracts attention from HMRC, because you have effectively taken a loan from your own company. An overdrawn directors loan is where S455 tax and benefit-in-kind rules come into play.

The two taxes that can apply to an overdrawn loan

There are two completely separate tax issues to keep straight, and people regularly muddle them. One is a company tax (S455), the other is a personal benefit-in-kind charge. They can apply together, separately, or not at all, depending on the size of the loan and how quickly you repay it.

1. S455 tax — the company-level charge

S455 tax (named after section 455 of the Corporation Tax Act 2010) is paid by the company, not by you personally. It applies when a director's loan is still outstanding nine months and one day after the end of the company's accounting period. The rate mirrors the upper dividend rate, which for 2026/27 is 33.75% of the outstanding balance.

The crucial point is that S455 is effectively a refundable deposit, not a permanent tax. Once you repay the loan to the company, HMRC refunds the corresponding S455 tax, although the refund is claimed nine months and one day after the end of the accounting period in which the loan was repaid, so the money can be tied up for a long time.

2. Benefit in kind — the £10,000 rule

The second issue is the benefit in kind director loan charge. If your overdrawn balance exceeds £10,000 at any point in the tax year and the company charges you either no interest or interest below HMRC's official rate, the difference counts as a taxable benefit. This is the famous £10,000 rule: stay under it across the whole year and there's no beneficial-loan benefit at all.

Where the threshold is breached, two charges follow:

• Income tax on you personally on the value of the cheap or interest-free loan (reported on a P11D), and
• Employer's Class 1A National Insurance payable by the company at 15% on the same benefit value.

You can sidestep the benefit entirely by having the company charge you interest at or above HMRC's official rate. The interest the company receives is taxable income for the company, but it removes the personal income tax and Class 1A NI on the director's side.

The calculator above lets you plug in your own balance and repayment date to see the likely S455 and benefit-in-kind figures. You can also open the full Director's Loan Calculator on its own page.

Tax consequences by scenario

The table below summarises the most common situations a director runs into. It assumes a single 12-month accounting period and uses the 2026/27 rates.

Worked example: how S455 is calculated

Suppose your company has a year-end of 31 March 2027. During the year you draw £30,000 from the business over and above your salary and dividends, leaving your director's loan account overdrawn by £30,000.

• Repayment deadline: nine months and one day after 31 March 2027, which is 1 January 2028.
• If you repay the full £30,000 before that date: no S455 tax is due at all.
• If you repay £10,000 but leave £20,000 outstanding: S455 applies to the remaining £20,000 only. That is £20,000 × 33.75% = £6,750 payable by the company alongside its corporation tax.
• If you repay nothing: S455 is £30,000 × 33.75% = £10,125.

Because the balance is also over £10,000 and interest-free, the company must additionally report a beneficial-loan benefit in kind, generating personal income tax for you and 15% Class 1A NI for the company on the value of the interest forgone. When you eventually repay the loan, the S455 deposit is refunded, but only nine months and one day after the end of the accounting period in which repayment falls. To compare this against drawing the same money as dividends or salary, try the Corporation Tax Calculator to see the company-side impact.

Bed-and-breakfasting: the anti-avoidance trap

A natural temptation is to repay the loan a day or two before the nine-month deadline to dodge S455, then withdraw the same money again straight afterwards. HMRC closed this off with two bed-and-breakfasting rules:

• The 30-day rule: if £5,000 or more is repaid and a similar amount is borrowed again within 30 days, the repayment is matched against the new loan and effectively ignored, so S455 still applies.
• The intentions rule: if the balance is £15,000 or more and, at the time of repayment, there is an intention to redraw the funds, the repayment can be disregarded regardless of the 30-day window.

The practical message: only a genuine, permanent repayment removes the S455 charge. Shuffling money around the year-end date does not work.

Director's loan vs salary vs dividends

A director's loan is a borrowing arrangement, not a way to extract profit. It is best seen as short-term flexibility, for example covering a personal cash-flow gap, rather than a substitute for proper remuneration. Salary is deductible for the company but attracts income tax and National Insurance; dividends are paid from post-tax profit and taxed at dividend rates but carry no NI. A loan defers the question but, if left overdrawn, ends up costing 33.75% in S455 plus potential benefit-in-kind charges, which is rarely cheaper than just declaring a dividend.

If your aim is to take money out for good, modelling the salary and dividend mix first usually makes more sense. The Salary vs Dividend Calculator and our guide to salary versus dividends for directors in 2026/27 walk through the trade-offs. For broader reading, see the business finance guides.

Common mistakes to avoid

• Treating the company's money as your own. Casual withdrawals all count toward the DLA. Without clean records you can lose track of how overdrawn you are.
• Forgetting the nine-month deadline. S455 is triggered by a single date. Diarise it for every accounting period.
• Assuming the £10,000 threshold is per withdrawal. It applies to the peak balance across the year, not to individual transactions.
• Relying on bed-and-breakfasting. The 30-day and intentions rules make year-end shuffling ineffective.
• Ignoring the benefit in kind. Even if you accept the S455 charge, a loan over £10,000 still needs a P11D and Class 1A NI unless interest is charged.
• Writing off the loan informally. A written-off director's loan is usually taxed as a dividend or as earnings, so it is not a free way out.

FAQs

Is S455 tax refundable?

Yes. S455 behaves like a refundable deposit. Once the overdrawn director's loan is repaid to the company, HMRC refunds the corresponding S455, although the refund is only due nine months and one day after the end of the accounting period in which the repayment was made.

What is the £10,000 rule for a director's loan?

If your overdrawn balance stays under £10,000 throughout the tax year, there is no beneficial-loan benefit in kind, even if the loan is interest-free. Go over £10,000 with no, or low, interest and the cheap-loan value becomes taxable, with income tax on you and 15% Class 1A NI on the company.

Does S455 tax apply if I repay the loan in time?

No. If the overdrawn balance is cleared within nine months and one day of the company's year-end, no S455 is due on the repaid amount. The charge only applies to whatever remains outstanding at that deadline.

Can I avoid the benefit in kind by charging interest?

Yes. If the company charges you interest at or above HMRC's official rate, there is no beneficial-loan benefit, so no personal income tax or Class 1A NI on it. The interest received is taxable income for the company, and S455 can still apply until the loan itself is repaid.

Is a director's loan a good alternative to taking dividends?

Only for short-term needs. As a way to extract profit permanently it is usually expensive, because an unrepaid overdrawn loan costs 33.75% in S455 plus possible benefit-in-kind charges. For lasting withdrawals, a planned salary and dividend mix is normally more efficient.

Sources

• gov.uk — Director's loans (overview)
• gov.uk — If you owe your company money (S455 and the £10,000 rule)
• gov.uk — Rates and thresholds for employers 2026 to 2027 (Class 1A NI)

This guide is general information, not personal financial or tax advice. For your own circumstances, speak to a qualified accountant.