What company directors need to know about the 2026 tax rules
An overdrawn Director’s Loan Account (DLA) can create significant tax liabilities for both a limited company and its directors.
Taking money from your company isn’t necessarily a problem, provided the withdrawals are properly recorded and the relevant tax rules are followed. However, where a director owes money to the company, allowing the balance to remain outstanding can have financial consequences.
Changes to tax rates in April 2026 have made it particularly important for directors to understand how outstanding loans are treated, when tax becomes payable and what happens if the company enters insolvency.
Here’s what you need to know.
What is an overdrawn Director’s Loan Account?
A Director’s Loan Account records money moving between a director and their company that isn’t otherwise accounted for as salary, dividends, reimbursed expenses or repayment of money previously lent to the company.
If a director withdraws more money than they are entitled to receive through these other arrangements, the account may become overdrawn.
This means the director owes money back to the company.
An overdrawn DLA is not automatically unlawful, but it must be properly recorded and managed. Depending on the circumstances, it may create Corporation Tax liabilities for the company and personal tax consequences for the director.
The company’s tax liability: Section 455 Corporation Tax
Where a close company makes a qualifying loan to a shareholder or other participator, Section 455 of the Corporation Tax Act 2010 may apply.
Most owner-managed limited companies are close companies for these purposes.
If the loan remains outstanding more than nine months after the end of the company’s accounting period, a Section 455 tax charge will generally become payable.
From 6 April 2026, the Section 455 tax rate increased from 33.75% to 35.75% for qualifying loans made on or after that date.
The rate applicable to an earlier loan depends on when it was made, rather than simply the date on which the tax becomes payable.
For example, a qualifying £20,000 loan made after 5 April 2026 could result in a Section 455 tax charge of £7,150 if it remains outstanding beyond the relevant repayment deadline.
This tax is paid by the company, not the director.
Although the company can generally obtain relief when the loan is subsequently repaid, released or written off, the timing of that relief depends on the statutory rules.
Where the tax is paid late, HMRC may also charge interest. Interest already incurred on overdue Section 455 tax is not refunded simply because the loan is subsequently repaid.
For companies already experiencing cash flow difficulties, this can create a significant additional financial burden.
Can an overdrawn DLA create a personal tax liability?
Yes. In addition to the potential Section 455 charge on the company, a director may face a personal Income Tax liability where they receive an interest-free or low-interest loan.
This is known as a beneficial loan or benefit in kind.
Under HMRC’s rules, a taxable benefit can generally arise where the total outstanding balance of relevant beneficial loans exceeds £10,000 at any point during the tax year.
HMRC’s official interest rate for beneficial loans is 3.75% from 6 April 2026, although directors should check the applicable rate for the relevant period.
Where the company charges less than the official rate, the difference may be treated as a taxable employment benefit.
The company may need to report the benefit and pay Class 1A National Insurance contributions, while the director may have an Income Tax liability.
These benefit-in-kind rules are separate from Section 455 Corporation Tax, so both may apply to the same outstanding loan.
Does HMRC require all overdrawn DLAs to be reported?
There is no general minimum reporting threshold for overdrawn Director’s Loan Accounts.
Where the relevant Corporation Tax reporting requirements apply, qualifying loans must be disclosed through the company’s Corporation Tax Return and supplementary CT600A pages.
A loan outstanding at the accounting year-end may need to be reported even if it is subsequently repaid before the Section 455 tax payment deadline.
The £10,000 beneficial-loan exemption should not be confused with the company’s Corporation Tax reporting obligations.
Accurate records are essential, including the dates of withdrawals, repayments and any amounts credited to the loan account.
What are HMRC’s bed and breakfasting rules?
Some directors attempt to avoid a Section 455 tax charge by repaying an outstanding loan shortly before the repayment deadline and then withdrawing similar funds again.
This is commonly known as bed and breakfasting.
HMRC has anti-avoidance rules designed to prevent certain temporary repayments from generating Section 455 tax relief.
Two important rules are:
The 30-day rule
Broadly, where repayments total £5,000 or more and new qualifying loans total £5,000 or more within a relevant 30-day period, the repayments may be matched against the new borrowing rather than the earlier loan.
This can prevent the earlier loan from being treated as repaid for Section 455 purposes.
The arrangements rule
This can apply outside the 30-day period where at least £15,000 is outstanding before repayment and arrangements already exist for further qualifying borrowing of at least £5,000.
The detailed statutory conditions and exceptions must be considered.
These rules mean that simply moving money into and out of the company bank account may not be sufficient to avoid a tax charge.
Directors should seek professional advice before making repayments where further borrowing is anticipated.
Can a company write off an overdrawn Director’s Loan Account?
A company may be able to formally release or write off an outstanding director’s loan, but this can have significant tax consequences.
Where a qualifying loan made by a close company to a shareholder or other participator is released or written off, the amount will generally be taxable as income for the individual under Section 415 of the Income Tax (Trading and Other Income) Act 2005.
For Income Tax purposes, the amount is generally treated as dividend income, subject to the applicable tax rules and rates.
There may also be Class 1 National Insurance implications where the write-off constitutes remuneration or profit derived from employment.
The company may be entitled to Section 455 tax relief following the release or write-off, but the timing of that relief is subject to statutory rules.
Writing off a loan is therefore not necessarily a straightforward or tax-efficient solution.
Where a company is insolvent or approaching insolvency, directors must also consider their duties to creditors before agreeing to release a debt owed to the company.
What happens to an overdrawn DLA if the company enters liquidation?
An overdrawn Director’s Loan Account is generally an asset of the company.
If the company enters liquidation, the outstanding balance does not automatically disappear.
The liquidator will review the account and consider whether the debt can be recovered for the benefit of creditors.
Depending on the circumstances, this may involve requesting repayment, agreeing an appropriate settlement or taking legal action to recover the amount owed.
The liquidator will consider the available evidence, the company’s records and the director’s financial circumstances when determining the appropriate course of action.
Directors should not assume that an overdrawn loan account will simply be written off because the company has ceased trading.
Equally, the fact that a liquidator has not immediately pursued repayment does not necessarily mean the debt has been legally released.
If you are considering closing a company with an overdrawn DLA, obtaining professional advice early is particularly important.
Can a director clear an overdrawn loan using salary or dividends?
There may be several ways to reduce or clear an overdrawn Director’s Loan Account, depending on the company’s financial position.
Repaying the loan
The director can repay some or all of the outstanding balance using their own funds.
Declaring a dividend
Where the director is also a shareholder, a lawfully declared dividend may be credited against the outstanding loan.
However, the company must have sufficient distributable profits and comply with the relevant company law requirements.
Dividends should not be declared simply to remove a loan balance where the company does not have the profits legally available for distribution.
Salary or bonus
A properly authorised salary or bonus may also be credited against the loan account, subject to the appropriate PAYE and National Insurance treatment.
However, directors cannot simply reclassify historical withdrawals as salary or dividends without establishing that the relevant entitlement existed and was validly authorised.
Where a company is experiencing financial difficulties, any proposed repayment or set-off should be reviewed carefully, particularly if insolvency is a possibility.
Frequently asked questions
Does every overdrawn Director’s Loan Account attract Section 455 tax?
No. Section 455 applies to qualifying loans made by close companies to participators or their associates, subject to statutory exemptions and reliefs.
Where a qualifying loan is repaid, released or written off within the relevant period, the company may not have to pay the charge.
What Is the Section 455 tax rate in 2026?
The rate is 35.75% for qualifying loans made on or after 6 April 2026.
Loans made before that date may be subject to earlier rates.
Has HMRC reduced the Director’s Loan Account reporting threshold to £5,000?
No. There has been no general reduction to a £5,000 reporting threshold.
The £5,000 figure appears in specific anti-avoidance rules, while the general small-loans exemption for beneficial-loan tax remains £10,000.
Can an overdrawn DLA be written off during liquidation?
An overdrawn DLA does not automatically disappear in liquidation.
The liquidator must consider the company’s right to recover the debt and the interests of creditors.
Any proposed release or settlement needs to be considered on its individual facts, including the legal and tax consequences.
Worried about an overdrawn Director’s Loan Account?
An overdrawn Director’s Loan Account can become a serious issue when a company is struggling financially.
What may initially appear to be a bookkeeping matter can develop into a significant tax liability or a debt that a liquidator seeks to recover personally from the director.
If your company is experiencing cash flow difficulties, has outstanding HMRC liabilities or may need to consider insolvency, it is important to understand how your DLA affects the overall position.
At BusinessRescueExpert, we help company directors understand their responsibilities and assess the options available when their business is facing financial difficulties.
Whether you are concerned about an outstanding Director’s Loan Account, pressure from creditors or the possibility of liquidation, our experienced team can help you consider the next steps.
Contact BusinessRescueExpert for confidential, practical advice about your company’s financial position.
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